Intra‐industry trade and the demand for child labor

• Date: 01 September 2014
• Published date: 01 September 2014
• Author: Kristian Estevez,Ting Levy
• DOI: http://doi.org/10.1111/ijet.12040

doi: 10.1111/ijet.12040

Intra-industry trade and the demand for child labor

Kristian Estevez∗and Ting Levy†

This paper examines the role of firm heterogeneity in the demand for child labor in an intra-

industry trade setting. Firms differ in their productivity levels and can employ children in

producing a heterogeneous good. The effect of trade liberalization will depend on how changes

in a firm’s productivity parameter affects the relativeproductivity between adults and children.

When the productivity elasticity of children is higher (lower) than that of adults, trade liberal-

ization will result in an increase (decrease) in the demand for child labor. Increasing the risk of

using child labor will decrease its demand in most scenarios.

Key wor ds child labor, firm heterogeneity,intra-industr y trade

JEL classification F1, J4, O1

Accepted 23 October 2013

1 Introduction

The phenomenon of child labor is a stubborn problem that continues to plague the least developed

countries and contributes to the perpetual cycle of poverty from which many have been unable to

exit. Although the incidence of child labor has been in decline over the past few decades, it remains

persistent in the poorest nations. Worldwide approximately 14 percent of children between ages 5

and 14 are economically active, but the percentage of child laborersin Asia is 17 percent, and in sub-

Saharan Africa 25 percent, according to the InternationalLabour Organization (ILO 2006). Research

on the causes of child labor has grown over the last 15 years, albeit principally rooted in one side of

the story, namely the decisions of households that determine the supply of child labor.1

Edmonds and Pavcnik (2005), Dinopoulos and Zhao (2007), Kis-Katos (2007), and Estevez

(2011) are a few recent theoretical papers that have examined the problem of child labor from the

demand side. This allows for the analysis of how trade liberalization, foreign direct investment, and

other policies affect the demand for child labor while controlling for supply factors. These papers

assume that children work in sectors that produce goods that are traded in an inter-industry trade

setting. In doing so, they incorrectly imply that the wages paid to children(or the children’s guardian)

reflect the productivity of the child worker. A study conducted by the ILO (2007) on child wages

and productivity reveals that differences in adult unskilled wages and child wages do not reflect the

productivity difference between the two factors of production. Even in sectors where children were

∗Department of Economic Theory, Universityof Barcelona, Barcelona, Spain. Email: kestevez@ub.edu

†Department of Economics, Florida Atlantic University,Boca Raton, Florida, USA.

1Basu and Van(1998), Ranjan (2000), and Jafarey and Lahiri (2002) are just a few notable papers that have looked at the

supply of child labor from the household perspective. Fora comprehensive survey of the child labor literature, see Brown

et al. (2003), Basu (1999), and Basu and Tzannatos (2003).

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International Journal of Economic Theory

Intra-industry trade and child labor Kristian Estevez and Ting Levy

nearly as productive as their adult counterparts, the child wage was anywhere from one-sixth to

one-fourth of the wage paid to adult unskilled workers (ILO 2007).

The aim of this paper is to look at the short-run demand for child labor in the presence of firm

heterogeneity and intra-industry trade in a model that incorporates the above stylized fact. The

model developed by Melitz (2003) will be used as the foundation for the present paper, which will

endogenously determine the cutoff productivity level needed for a firm to remain in an industry

and the export cutoff productivity level needed to make it profitable for a firm to export their

good. Having asymmetric firms allows us to examine how trade liberalization, together with its

effect on both the intensive and extensive margins, affects the demand for child labor. This would

not be possible if we assume that firms are symmetric. As will be shown, sector characteristics,

how changes in a firm’s productivity parameter affect the relative productivity of child and adult

workers, will determine whether trade liberalization can remedy or exacerbate the demand for child

labor.

Intra-industry trade, while not as prevalent in developing countries as in industrialized countries,

is still a significant source of trade between countries in the economic South and therefore must be

examined with regard to child labor.2Firms that are engaged in intra-industry trade in developing

countries tend to be located in industries where the employment of child labor is present. Balassa

(1979) examined and noted that in less developed countries, intra-industry trade was prevalent in

sectors such as textiles, fabricated metal goods, and paper, clay, and glass products. Kucera (2002)

examined sectors where child labor was most rampant in developing countries and concluded that

child labor employed in the export sector was mostly located in textiles, apparel, craft production,

and other light manufacturing in developing countries, industries that Balassa (1979) found were

most likely to engage in intra-industry trade in less developed countries.

Empirical research into the demand side of child labor is relativelylacking when compared to the

amount of work done on household factors. Unfortunately,the difficulty of acquiring firm-level data

on child labor which would be necessary to test the results of this paper’s model is extraordinary,

and even if it were possible, the survey’s reliability would be questionable due to disincentives faced

by firms with regard to disclosing information on the use of child labor and the wages paid to all

workers. Using macro-level data, Kucera (2002), Busse and Braun (2004), and Davis and Voy (2007)

have empirically found a relatively weak relationship between trade liberalization and child labor

once changes in income are accounted for. The use of macro-level data cannot examine the sectoral

differences which are examined in this paper. The lack of data necessitates a theoreticalapproach to

examine the implications of trade liberalization on the demand for child labor accounting for the

fact that child labor productivity, relativeto adult workers, may vary across sectors.

This paper is partially related to the literature exploring intra-industry trade and inequality

between factors. Kurokawa(2011), for example, has a model in which high-skilled workers are com-

plements in production with symmetric intermediate varieties produced using low-skilled workers.

He finds that since trade increases the number of varieties available to produce final goods, this

variety–skill complementarity increases the skill premium and increases inequality. More recently,

Bas (2012) examined how the wages of low and high skilled workers are affected by the choices

made by firms to upgrade their technology using Melitz’s framework. Since the upgraded tech-

nology is biased toward skilled workers and only the most productive firms find it profitable to

2Baland and Robinson (2000) note the need to consider firm heterogeneity before concluding that a ban on child labor

will always lead to a Pareto improvement. Hummels and Klenow (2005) examine the extent of the extensive margin in

126 countries and show that within-export variety makes up a large percentage of exports for large developing countries

such as China (0.70) and India (0.44).

276 International Journal of Economic Theory 10 (2014) 275–294 © IAET