The Economics of Child Labor: Reply
By KAUSHIK BASU AND PHAM HOANG VAN*
Kenneth A. Swinnerton and Carol Ann Rog-
ers (1999) have drawn attention to the policy of
redistribution as an instrument of eliminating
child labor in an economy. They point out that
in our model (Basu and Van, 1998), whenever
there exists an equilibrium in which no children
work, there must exist some profit-sharing rule
among the citizens such that if that rule were
effective then in no equilibrium would children
be found working.
Their result is valid and important for design-
ing policy. It is, however, easy to misunder-
stand. Hence, Section I is a comment on the
interpretation of this result. Section II shows
that the result may not be as widely applicable
as appears at first sight. There is a general
model, of which their model and ours are two
polar extremes. Reality lies in between.
I. Interpretation
The kind of redistribution that Swinnerton and
Rogers (henceforth, SR) write about concerns the
ownership of firms. In their model, workers own
shares; so profits may accrue to the workers. In an
equilibrium in which profits are high, workers
may be sufficiently well off not to want to send
their children to work, even though their wages
may be low. SR assume that, of the N workers, a
fraction get all the profit in the economy; and
their model is well defined as long as 0. So a
world in which some workers own shares but not
all shares are owned by the workers is not even
possible in their model. While our model de-
scribed a polar case in which workers had no share
in the profits, theirs is the other polar extreme. We
shall come back to this later; let us here examine
how their result may be interpreted in the context
* Basu: Office of the Senior Vice President, develop-
ment Economics, World Bank, 1818 H Street, NW, Wash-
ington, DC 20433, and Department of Economics, Cornell
University, Ithaca, NY 14853 (e-mail: kb40@cornell.edu);
Van: Department of Economics, 118 Professional Building,
University of Missouri, Columbia, MO 65211 (e-mail:
pham@missouri.edu). Support from the project, Intra-
household Decisionmaking, Literacy and Child Labor
(World Bank, RPO # 683-07), is gratefully acknowledged.
1386
of policy-making. We draw attention, in particu-
lar, to two caveats.
The problem with SRs formal recommenda-
tion is that it is not practicable. No matter what
value takes in the entire range of models they
consider, to wit, (0, 1], the redistribution
involved is massive because all profit must ac-
crue to the workers. But their suggestion, inter-
preted as a general appeal to redistribution as an
instrument of curbing child labor, is appealing
and deserves attention. In particular, it suggests
that a system of taxing profits and transferring
some of the benefits to the workers may be a
good way to encourage workers to withdraw
their children from the work force. In practice
one can go further and make the transfer con-
ditional on children being withdrawn from the
labor force. Bangladeshs Food-for-Education
Program in which participating households re-
ceive monthly food rations (as long as they send
their children to school) is, in a way, a similar
program, especially because there is evidence
that this incentive has resulted in parents with-
drawing their children out of the labor force
(Martin Ravallion and Quentin Wodon, 1999).
The second caveat to be kept in mind is that
what SR strictly show is that (in an economy
satisfying certain conditions) there exists a dis-
tribution of ownership of firms such that no
child labor will occur. They do not address the
question of how such a distribution can be
brought about. It is conceivable that an attempt
at such redistribution will have a negative im-
pact on aggregate output; and that, in turn, can
again give rise to child labor. Hence, what SR
derive is a result on the comparative statics of
alternative distributions and not on the conse-
quences of switching from one distribution to
another. For the latter it is necessary to supple-
ment their model with an analysis of how in-
centives are affected by redistribution policy.
II. Generalization
To put the above discussion on a more formal
footing and to pave the way for a generalization,
VOL. 89 NO. 5 BASU AND VAN: THE ECONOMICS OF CHILD LABOR, REPLY
let us take to be the share of economywide
profits that accrue to workers in the aggregate.
(The notation and model structure, unless ex-
plicitly specified otherwise, is the same as in
Swinnerton and Rogers, 1999.) Hence, the div-
idend earned by each dividend-receiving house-
hold is given by / N and the income
earned by a household in which only the adult
works is given by w / N. It is now easy
to see that if we work with the assumption
0, we will get the Basu-Van model; whereas if
we set 1, we get the SR model. This
clarifies that SRs model is not a general one, of
which Basu and Van (1998) is a special case.
Instead, of the class of models described by
[0, 1], SRs model and ours are two polar spe-
cial cases. What is important is to analyze the
most realistic case in which can take any
value in (0, 1), that is, workers earn some of the
profits in the economy, but not all.
As in the Basu-Van model, SR focus on the equi-
librium in which all children work or no children
work. What they do not remark on is that in their
model there may not exist either of these two kinds
of equilibria. However, whenever such equilibria do
not exist, there must exist another equilibrium in
which some children work and some do not. We
shall call it a hybrid equilibrium. This is of some
interest because it generates what is true in reality
(namely, that the children of only some workers
work), starting from an ex ante homogeneous model.
To understand this better, and at the same
time not to be encumbered by unnecessary com-
plications, assume 1 and define Y(C, ) to
be the income earned by a household that does
not send its child to work in an economy in
which C children work. Clearly,
C, w
(1) YC, w ,
N ous. Hence, there must exist C* such that Y(C*,
where (C, w) is the total profit, when C
children work, and w is the wage rate. Inserting
the full expression for profit and noting that
wage is always equal to marginal product, we
may write (1) as
(2) YC,
fN C N N Cf N C
N N
1387
We shall now relax a strong assumption that SR
used and we had used in our earlier work (because
it was harmless in that context). As before, we
assume that if the income of a household from
nonchild labor sources (in brief, adult income)
is less than 2s, the child works; if it exceeds 2s, the
child does not work; and (unlike in our previous
work), if it is exactly equal to 2s, then the house-
hold is indifferent between sending and not send-
ing the child to work. Basically, we are now
abandoning the arbitrary tie-breaker assumption
that we had used in our earlier work. It is easy to
show that there exists a continuous utility function
which generates this kind of behavior, even when
child labor supply can be chosen from a contin-
uum (Basu, 1999).
Consider now the following inequality:
(3) YN, 2s Y0, .
Check that (3) can be valid, for instance, if
1. This is a direct consequence of SRs (5b).
Hence, it is entirely possible that the kind of
equilibrium that SR talk about (where all or no
children work) may not exist. Interestingly, in
their model, whenever that happens, there must
exist another equilibrium in which some chil-
dren work.
Observe that C* [0, N] is an equilibrium
amount of child labor if Y(C*, ) 2s. This is
because Y(C*, ) 2s implies that, when C* chil-
dren work, households are indifferent between send-
ing their children to work and not sending them to
work. Hence, if C* households send their children to
work and N C* do not, then no household stands
to gain by altering its behavior. If C* (0, N), we
call it a hybrid equilibrium.
Since we are considering the case where (3)
is true, we know that C* 0 or N. Next since
f and f are continuous functions, Y is continu-
) 2s. This establishes the existence of a
hybrid equilibrium.
To understand some of its properties, differ-
entiate (2) with respect to C,
YC,
(4)
C
N N Cf N C
. .
1388 THE AMERICAN ECONOMIC REVIEW DECEMBER 1999

It is now easy to check the following: another in which some children work. This is so
despite the fact that ownership of shares is com-
(i) If 1/(1 ), then Y(C, )/C 0, pletely equitable across all worker households
for all C. ( 1). This means that Corollary 1 of SR is
(ii) If 1, then Y(C, )/C 0, for all predicated on their assumption 1, that is, all
C. profit in the economy accrues to the workers.
(iii) If (1/(1 ), 1), then there exists a
critical value of C, given by C( ) (1 REFERENCES
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Labour. Economic Journal, 1999 (forth-
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Basu, Kaushik and Van, Pham Hoang. The Eco-
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), 1), we can find a value of s such that there Review, June 1998, 88(3), pp. 41227.
will exist three labor-market equilibria, one in Ravallion, Martin and Wodon, Quentin. Does
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