CHILD LABOR IN NEPAL A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Mina Chung May 2013
CHILD LABOR IN NEPAL
A THESIS
Presented to
The Faculty of the Department of Economics and Business
The Colorado College
In Partial Fulfillment of the Requirements for the Degree
Bachelor of Arts
By
Mina Chung
May 2013
CHILD LABOR IN NEPAL
Mina Chung
May 2013
Economics
Abstract
Child labor is an on-going phenomenon in developing countries. In the world,
International Labour Organization (2002) estimates 250 million children to be a part of
child workforce. There have been many studies done at the microeconomic level to
explain why child labor occurs and what can be done to end it. There are also a growing
number of country-specific studies such as one on Vietnam by Erik Edmonds and another
on Tanzania by Kathleen Beegle. The country I will study for this thesis is Nepal.
In Nepal, there are child labor laws that restrict child labor to children 14 years
old and older and are restricted from hazardous work. However in occasional interviews
and surveys, they have found that children are still being employed for work. Another
important aspect of child labor is the lack of education. In Nepal, the government has
been forward thinking enough to provide free primary education and free textbooks for
eligible students, but other costs of attendance are a heavy burden on the poor families.
The purpose of the paper is to analyze the determinants of child labor in Nepal and to
address how the current law in Nepal is affecting the children’s education, child labor,
and ultimately the overall quality of life in the country. Idealistically, to find possible
steps that could make a difference on child labor and a course of action that could
eventually eliminate or minimalize the extent of child labor.
KEYWORDS: (Child Labor, Education)
TABLE OF CONTENTS
ABSTRACT ii
LIST OF TABLES vi
LIST OF FIGURES vii
1 INTRODUCTION 1
2 LITERATURE REVIEW 12
2.1 Background of Nepal..................................................................................... 12
2.2 Nepalese Government Laws........................................................................... 13
2.3 Family Income................................................................................................ 14
2.4 Family Investment Decisions......................................................................... 17
2.5 Returns to Schooling/Education..................................................................... 20
2.6 Proximity of Schools...................................................................................... 21
2.7 Debt Bondage................................................................................................. 22
2.8 Effectiveness of Child Labor Regulations..................................................... 23
2.9 Idleness of Children....................................................................................... 25
2.10 Globalization…………………………........................................................ 26
2.11 Chapter Summary………………………..................................................... 27
3 THEORY 29
3.1 Macroeconomics of Child Labor.................................................................... 29
3.2 Steady States with Endogenous Policies........................................................ 30
3.3 Debt Bondage…………………………......................................................... 31
3.4 Interlinked Transactions………………......................................................... 34
3.5 Welfare Effects………..………………......................................................... 35
3.6 Trade Sanctions……..………………............................................................ 36
4 THEORETICAL ANALYSIS 37
4.1 Household’s Allocation of Child’s Time in School and Work…………… 37
4.2 Effects of the Increase in the Parameters....................................................... 38
4.3 Child Education Law….………………......................................................... 42
4.4 Household Loans…..….………………......................................................... 43
4.5 Loan Sources and Child Labor………........................................................... 45
4.6 Access to Credit Market and Child Labor...................................................... 45
4.7 Loan, Loan Rates and Child Labor……........................................................ 49
4.8 Indebtedness and School Enrollment.…........................................................ 51
5 CONCLUSION 53
6 SOURCES CONSULTED 55
LIST OF TABLES
1.1 Distribution of Children, by Age, Sex, and Locality………………………............... 3
1.2 Percentage Distribution of Households with Children, by Source of
Drinking Water and by Locality………………………….....………………………..
5
1.3 Percentage Distribution of Households with Children, by Facilities Owned……….. 6
1.4 Literacy Rate of Children Aged 5-17 Years, by Sex and Locality……….................. 8
1.5 Distribution of Children, by Economic Activity…………………………………… 8
1.6 Percent Distribution of Children, by Industrial Group, Region and Sex……………. 9
1.7 Distribution of Working Children, Child Labor, and Hazardous Work……………... 10
4.1 Interest Rates of Formal Institutions………………………………….……………... 45
4.2 Amount of Loans and School Enrollment…………………………………………… 51
LIST OF FIGURES
1.1 Population Density Map in Nepal…………….……………………………….……… 3
1.2 Percentage Distribution of Children, by Sex and Level of Education………..………. 7
2.1 Child Labor and Growth……..……..……..……..……..……..……..……..………… 15
4.1 Household Budget Constraint and Indifference Curve……..……..……..……..…….. 38
4.2 Increase in Adult Wage……..……..……..……..……..……..……..……..………….. 39
4.3 Increase in Child Wage……..……..……..……..……..……..……..……..……..…… 39
4.4 Child Labor Supply and Wage Rate……..……..……..……..……..……..………….. 40
4.5 Increase in Price of Goods……..……..……..……..……..……..……..……..………. 41
4.6 Effect of Free Education……..……..……..……..……..……..……..……..………… 43
4.7 Full-Time School Attendance Due to Low Opportunity Costs…………………….…. 47
4.8 No School Attendance Due to High Opportunity Costs……………………………… 48
4.9 Partial School Attendance…………………………………………………………...... 49
4.10 The Lorenze Curve for School Enrollment…………………………......………...... 51
1
CHAPTER I
INTRODUCTION
Nepal is a small country in South Asia between India and China.
Source: http://mustangnature.org/inner.php?go=Nepal-
Located&do=show&to=199&browse=yes
Economics
Nepal has been on a steady economic growth of 3% per year since 1995. GDP per
capita has more than doubled from 200 US $ in 1995 to 480 US $ in 2008. Alongside the
economic growth, the country’s overall health status has improved. From 1995 to 2008,
total fertility rate and life expectancy at birth improved from 5.2% to 3% and 57.9 years
to 63.7 years respectively. Additionally, education seems to have become widespread as
the Nepal’s adult literacy rate has doubled from 28% to 56.5% from 1995 to 2008. The
literacy rate of the females almost doubled while the male’s literacy rate increased almost
20%. The increase in literacy rate arose from the proportion of adults who attended
2
schools because from 1998 to 2008, the literacy dropped from 60.3% to 46.7% for the
adults who never attended school.1
The Nepal Child Labour Report (2008) describes the latest update of the situation
concerning child labor in Nepal. The report was drawn from another report called Nepal
Labour Force Survey 2008 that was conducted by the International Labour Organization
(ILO) Central Bureau of Statistics of Nepal. The report consists of many conditions that
affect the quality of life which includes but are not limited to: available resources such as
electricity and water, education levels, and economic activities.
Demographics
The most recent population census of Nepal states that 26.62 million with about a
third being children.2 Among them, 85% live in the rural regions which leave 15% in the
urban areas. The average number of children per household is 1.9 and 2.3 respectively in
urban and rural areas. Moreover, the highest average number of children is held by the
Muslim group with 2.8 children. The distribution of children in Nepal shows the change
over time of parents’ preferences for children. Figure 1 on the following page illustrates
the population density in Nepal by provinces.
1 http://www.ilo.org/wcmsp5/groups/public/@asia/@ro-bangkok/@ilo-
kathmandu/documents/publication/wcms_118294.pdf
2 http://www.citypopulation.de/php/nepal-admin.php
3
FIGURE 1.1
POPULATION DENSITY MAP IN NEPAL
TABLE 1.1
DISTRIBUTION OF CHILDREN, BY AGE, SEX, AND LOCALITY
(thousands)
Total
number of
children
5-9 years 10-13 years 14-17 years
Locality Male Female Total Male Female Total Male Female Total
Nepal 7770 1510 1468 2978 1356 1267 2623 1070 1099 2169
Urban 1022 191 163 355 173 159 332 175 161 336
Rural 6748 1319 1305 2624 1183 1108 2291 895 938 1833
Source: Nepal Child Labour Report 2011
In the both urban and rural areas, a slight increase in sex ratio can be observed.
Also, there are an increasing number of children in each category as the age group gets
smaller. The increase of parents’ preference for is captured in one time period. The
subsequent generations of Nepalese bear more children. Interesting to note is that the
Kathmandu
4
proportion of all the children living in Nepal in rural regions is 87% and 13% in urban
areas.3
Available Resources
Nepal’s main source of lighting is electricity, gas, oil, and kerosene. In
households with children, 54.4% of the households have access to electricity and 34.2%
to gas, oil, or kerosene. However, the distribution of lighting is not equal in all parts of
Nepal. Development of technology is much more evident in the urban areas with more
than 92% of the families with electricity, while only 47.7% of the families in the rural
region have access to it.
Access to potable water is limited in Nepal. Table 2.2 on the following page
displays the sources and accessibility to drinkable water in different regions: rural, urban,
and the capital of Nepal, Kathmandu. Each area’s development can be distinguished by
the availability of piped water in the households: 40%, 58%, and 77% in rural, urban, and
the capital respectively. Additionally, households in rural areas continue to rely heavily
on hand pumps and boreholes; furthermore, spouts and spring water is still significantly
used.
3Over time, it is likely that there will be a bigger income, education, and health gap. This
is due to the fact that the Nepalese living in the urban areas reproduce less while those
living in rural areas increase in fertility.
5
TABLE 1.2
PERCENTAGE DISTRIBUTION OF HOUSEHOLDS WITH CHILDREN,
BY SOURCE OF DRINKING WATER AND BY LOCALITY
Locality Piped
Water
Hand pump/
borehole Well
Spout/
Spring water Other
Nepal 43.1 41.2 3.3 9.8 2.6
Kathmandu 77.1 6.0 7.4 4.4 5.1
Urban 58.4 31.7 4.0 3.5 2.4
Rural 40.4 42.9 3.1 10.9 2.6
Source: Nepal Child Labour Report 2011
Modern Facilities
In Nepal, over half the population doesn’t have access to toilets. Roughly 23% of
the population has access to modern toilets, also known as a squat toilet. These toilets do
not have a flushing mechanism; instead a bucket of water and a ladle like object is nearby
to clean the toilet. The remaining 23% of the population have access to flush toilets. 60%
60% of urban households have access to flush toilets with 17% without any toilet
facilities. For rural households, the stats seem to be flipped, 60% have no toilets while 17%
have access to flush toilets.
Modern amenities include telecommunication such as radio, television, telephone,
mobile phone, and a computer. Table 1.3 displays the percentage of households that own
telecommunication means.
6
TABLE 1.3
PERCENTAGE DISTRIBUTION OF HOUSEHOLDS WITH CHILDREN,
BY FACILITIES OWNED
Locality Radio Television Telephone Mobile phone Computer
Nepal 57.8 32.1 8.8 26.6 2.6
Urban 66.4 73.3 30.6 63.3 12.5
Rural 56.3 24.8 5.0 20.1 0.9
Source: Nepal Child Labour Report 2011
Contrary to expectation of older technological devices to be more prominent in
the households, the mobile phone exceeds the number of land line phones in Nepal. This
trend parallels the global movement. However, households that own computers are very
few in number.
Education Levels
Nepalese government has made primary education free to give opportunity for all
children to attend school without a financial burden on their parents. However, some
parents fail to understand the value of education because the reward is delayed and not
immediate as their children working is. The children in Nepal, ages 5 to 17, make up a
third of the population. Among them, 696 thousand children have never attended school
and another 4.57 million children have not finished primary school.
7
FIGURE 1.2
PERCENTAGE DISTRIBUTION OF CHILDREN,
BY SEX AND LEVEL OF EDUCATION
Source: Nepal Child Labour Report 2011
Of those children who do not attend school, the greatest proportion of absence comes
from the age group 14-17 year olds with 50%, girls with 60%, and from the rural sectors
with 93%.
Literacy Rate
Literacy rate of children in Nepal is relatively high compared to the amount of
education they receive. Table 1.4 below shows the literacy rate of all children and those
of working children. Overall, it appears that working children have higher literacy rate,
for both genders. However, this is not the case in Urban areas, including Kathmandu.
Working children appear to have lower literacy rate compared to those who don’t work.
0
10
20
30
40
50
60
70
Never
attended
Less than
primary
Primary Lower
Secondary
Secondary Others
Per
cen
t
Boys
Girls
Total
8
TABLE 1.4
LITERACY RATE OF CHILDREN AGED 5-17 YEARS,
BY SEX AND LOCALITY
Locality
All children Working children
Boys Girls Total Boys Girls Total
Nepal 84.8 80.0 82.4 91.2 82.5 86.5
Kathmandu 96.3 96.9 96.6 91.9 89.9 90.9
Urban 91.2 90.6 90.9 93.1 89.8 92.1
Rural 83.8 78.5 81.1 91.2 82.0 86.2
Source: Nepal Child Labour Report 2011
Economic Activity
Out of the 7.7 million children in Nepal, 3.1 million are economically active as of
2008. More girls participate compared to boys, 54% and 46% respectively. In urban
setting, there are an equal number of boys and girls that are employed. The children’s
economic activity includes agriculture, handicrafts, construction, fetching water,
collecting firewood, and other miscellaneous activity. The distribution is displayed in
Table 1.5 shown below. According to the data, children’s main activity with over 93% of
economically active children working is agriculture.
TABLE 1.5
DISTRIBUTION OF CHILDREN, BY ECONOMIC ACTIVITY
Economic Activity Number of children (thousands)
Agriculture 2932
Handicrafts 35
Construction 15
Fetching water 787
Collecting firewood 600
Miscellaneous activity 288
Note: Some children are involved in more than one economic activity.
Source: Nepal Child Labour Report 2011
9
In regards to employment, agriculture and fishing industry is once more the
leading economic activity followed by the electricity, gas, and water supply industry. The
three major industrial groups are agriculture, industry, and service. The distribution of
employed children is displayed in Table 1.6.
TABLE 1.6
PERCENT DISTRIBUTION OF CHILDREN,
BY INDUSTRIAL GROUP, REGION, AND SEX
Agriculture Industry Service
Nepal 87.7 2.5 9.8
Urban 60.7 7.5 31.8
Rural 89.5 2.2 8.4
Sex
Boys 86.1 2.7 11.2
Girls 89.1 2.3 8.6
Source: Nepal Child Labour Report 2011
Clearly, agriculture is main activity for all children. However, a high
concentration of rural children work in agriculture while only about 61% of urban
children work in agriculture and 32% work in service industries.
Child Labor and Hazardous Work by Children
Although many children are working, only about half of them are categorized as
child labor. According to the definition of child labor the Labour Force Survey Report(?)
used, it is defined as children being engaged in any of the following activities:
a) Children aged 5-9 years who are employed for one or more hours in the
reference week;
10
b) Children aged 10-13 years who are employed for 15 or more hours in the
reference week; and
c) Children aged 14-17 years who work in designated hazardous industries and
occupations, or are engaged for 43 or more hours of work in the reference week in
industries and occupations not designated as hazardous.
Additionally hazardous work is defined as a) work in designated hazardous
industries or occupations in which the employment of children under the age of 18 is
prohibited, or b) work for weekly hours that exceed a certain specified threshold which,
and for the purposes of this report, is set at 43 or more hours of work per week.
Table 1.7 displays the percentage of working children, and those that are
considered to be child labor or in a hazardous environment. Contrary to the
aforementioned statistics of urban cities employing fewer children, a higher proportion of
children in urban cities are engaged in hazardous work, despite the smaller percentage of
overall working children in urban cities.
TABLE 1.7
DISTRIBUTION OF WORKING CHILDREN,
CHILD LABOR, AND HAZARDOUS WORK
Percentage of
working children
Percentage of
child labor
Percentage of child workers
engaged in hazardous work
Nepal 40.4 50.9 19.7
Urban 18.9 48.4 31.2
Rural 43.7 51.1 19.0
Source: Nepal Child Labour Report 2011
11
Non-Economic Activities
Main non-economic activity is non-paid housekeeping activities or chores for
Nepalese children. In Nepal, all children are engaged in household chores to an extent,
with it ranging from one hour to more than 42 hours a week. In average, most children
spend about 3.7 hours a week helping around the house which includes “cooking, minor
repairs, shopping, caring and child minding in their own household.”4
4 Nepal Child Labour Report 2008, International Labour Organization and Central
Bureau of Statistics of Nepal, Nepal
12
CHAPTER II
LITERATURE REVIEW
Children have been working since the beginning of civilization. Working for the
family was appropriate and even thought to be beneficial for the family and the children.
The society truly believed that without being involved in the workforce, children would
become idle and in turn become malignant members in the community.5
Growing concerns for working children have been on a rise because of the impact
of an economic downturn in some countries. As a result, different policies have been
implemented in several countries to minimalize child labor. Low income and poverty of
developing countries pushed many members of the family to work in different sectors.
This led many children to continue working for their family. Much evidence shows that
advancements in technology and the greater number of jobs it produces have increased
the number of child labor.
Background of Nepal
Nepal is a small country where poverty is rooted in their history. According to the
Human Development Index (HDI) from the United Nations, Nepal ranks 157 out of 187
5 Doepke, M., & Zilibotti, F. (2005). The Macroeconomics of Child Labor Regulation.
The American Economic Review, 95(5), 1492-1524.
13
countries with the index of 0.458.6 Nepal’s HDI is a low number. United States for
example has an index of 0.910. HDI is a combined score of life expectancy, education
index, and income index. Therefore, a low index indicates that the quality of life is poor.
The annual per capita gross domestic product of Nepal is $1,049 (constant 2005
international dollars). The World Bank data from 1996 shows that 42% of the population
were estimated to be below poverty line. More recently, in 2011, the population below
poverty line decreased dramatically and 25% of the population was found to be in
poverty which includes 6% in rural area and 3.2% in urban area.7 Nepal’s life expectancy
at birth is 68.1 years. Over the course of 5 years, the life expectancy has improved 8%.
Also, the adult literacy rate is 59.1% and it has improved 17.8% since 2004.
Nepalese Government Laws
The Nepalese government established a child labor law in 1992 that set a
minimum age for employment of children at 14 years. Furthermore, it limited children
from working at factories, mines, or similar hazardous work and it prohibited any form of
slavery, bonded labor, and trafficking of individuals. Nepalese government granted thirty
minutes of break time for every three hours of child labor and one day off a week.
Education law has also been set in Nepal. Although education is not required,
government has created a policy to provide free primary education. However, in practice,
free education is only provided up through third grade in urban areas and through fifth
6 International Human Development Indicators. Retrieved October 5, 2012, from
http://hdrstats.undp.org/en/indicators/103106.html
7 The World Bank. Nepal | Data. Retrieved October 5, 2012, from
http://data.worldbank.org/country/nepal?display=graph
14
grade in rural areas. Apart from the covered costs of tuition and textbooks, parents still
have to provide their children with 200 rupees ($4.54) to allow their students to attend
school full time each year.8
Family Income
The poverty is a way of life that is prominent in the rural area of Nepal. The most
common way to make income in the rural area is through agriculture. Agriculture is
crucial to a Nepalese’s everyday living, yet its structure has not changed much over the
years. The greatest form of agriculture found in Nepal is subsistence farming, which is
farming to feed the family. “The poor agricultural development leads to low
redistributive capacity of development,” meaning no growth in agriculture will limit the
country from expanding and developing to gain means of growing; “which ultimately
leads to unsustainable use of natural resources. Low technology level is one reason for
low productivity. Low literacy rate and low health status due to poor social and economic
infrastructure have made technological changes a difficult process.”9
Galli studied the economic impact of child labor at the micro and macro level. At
the micro level, the parents who require their children to work are those who are living at
the poverty level and as expected, the short term result of child labor is it increases
household income. The short term effect of increased household income misleads the
8 United States Department of Labor.ILAB - Nepal. Retrieved October 5, 2012, from
http://www.dol.gov/ilab/media/reports/iclp/sweat/nepal.htm#.UHzjFG-HKuI
9 Lamichhane, D. K., & Shrestha, S. (June 2008). Education, Health and Agricultural
Expenditure and Their Impacts on Rural Poverty in Nepal: Time Series Data
Analysis.
15
parents to believe that having more children alleviates the poverty level. In doing so,
more children go into the workforce to help the family. Furthermore, the long term results
are the lack of education does not help individuals acquire human capital which could
potentially help the children earn higher wages as an adult. The two long term effects
build on each other and send the families in poverty in an endless cycle towards a deeper
level of poverty where survival factor is at hand.10
The long term impact at the macro level can be summed up by the Figure 2.1 on
the following page.
FIGURE 2.1
CHILD LABOR AND GROWTH
Source: Galli, R. (2001). The Economic Impact of Child Labour.
Galli’s figure explains six variables that are affected by child labor that determine
the outcome of the growth of the country. Poverty pushes parents to put their child in
labor and the additional income they attain, leads them to increase fertility and as a result
10
Galli, R. (2001). The Economic Impact of Child Labour.
16
children are less likely to attend school, decreasing human capital accumulation. Children
work in dangerous places that put their health or their lives at risk to increase the family’s
income which results in less opportunity for them in the future. Availability of cheap
labor decreases incentives for employers and major firms to invest in technological
innovations. The surplus of cheap labor continues to lower wages for the uneducated.
Gender gap increases due to girls working in households without paid wages and lack of
experience that builds work which can qualify them for market jobs.11
Brown in his study
gives evidence that girls commonly work for their parents in the household or at their
parents’ workplaces.12
These six factors lead to a decrease or a non-increasing growth of
the country. Each factor affects another factor and the six factors create an endless cycle
that leads to an increase in child labor and a decrease in economic growth of the country.
In Nielson’s study of Zambia, child labor is predicted to cause a GDP loss of 1-2%.13
In a more recent study by Beegle, Dehejia, and Gatti, they agree with Galli’s
findings on the long run effect that the six factors: human capital accumulation, fertility,
health, investment and technical change, income inequality, and gender inequality will
inhibit the country’s growth. However, they also discovered that in a five to ten year
period, “the negative effect [of a loss of education] is offset by increased earnings from
11
Galli, R. (2001). The Economic Impact of Child Labour.
12 Brown, D. K., Deardorff, A.V., & Stern, R.M. (2002). The Determinants of Child
Labor: Theory and Evidence.
13 Nielsen, H. S. (1998). Child Labor and School Attendance: Two Joint Decisions.
Aarhus, Denmark : Centre for Labour Market and Social Research.
17
wage and farm work among those who worked as children” and “the loss from reduced
education is more than fully offset by increased labor market experience as a child.”14
Family Investment Decisions
Earlier literature concerning the choice between child labor and education
emphasizes the significant effect of availability of variety of jobs. According to
Koolwal’s literature on son preference and child labor, earning opportunities increase for
girls and the preference for sons is greatly reduced. Nepal, like many Asian countries, has
a strong desire for sons rather than daughters. Through observations, it appears that son
preference and discrimination against girls go hand in hand. Reasons for high preference
for sons are for dowry, which is the money the bride brings to the groom (or his family),
and for the comfort of the parents because Asian tradition relies on the sons in the family
taking care of their old parents. However, it is to be noted that the neglecting the rights of
girls to education is not equivalent to son preferences. The forms of discrimination are
abortion, infanticide, and abuse against the unborn child. The parents see sons as having
the best potential to make an income and to support the family because of the stature and
the built of a male’s body.15
Girls work mostly for the family doing house chores making
14
Beegle, K., Dehejia, R., & Gatti, R. (2004). Why Should We Care About Child Labor?:
The Education, Labor Market, and Health Consequences of Child Labor. Cambridge,
Mass: National Bureau of Economic Research.
15 Koolwal, G. B. (May 2007). Son Preference and Child Labor in Nepal: The Household
Impact of Sending Girls to Work.
18
no wages as explained by a high concentration of female children in the household
sector.16
Akresh and other economists added one more factor that affects parents’ decisions
to send a child to school: child’s ability. In their findings, “higher ability children,
compared to their lower ability siblings, are more likely to be enrolled in school and
perform fewer hours of child labor. [They] also find that the child labor they do is less
concentrated in tasks requiring long, continuous blocks of time to complete.”17
Also, Ilahi
states that multiple children in the family gives the parents a choice to send certain
children to work and the way they choose which child attends school is largely
determined by the child’s ability.18
On the contrary, other studies have shown that children who are firstborns are
more likely to work and are less likely to attend school in order to help the family. As a
result, younger siblings are more likely to attend schools. This selectivity is more evident
in rural settings because the family size is typically larger to accommodate for the great
amount of labor needed to maintain their agriculture.19
The family’s income increases but
the number of children in the family causes their level of income relatively equal to the
16
Edmonds, E. V. (2005) Understanding Sibling Differences in Child Labor. The Journal
of Population Economics.*
17 Akresh, R., Bagby, E., de Walque, D., & Kazianga, H. (2012). Child Labor, Schooling,
and Child Ability. Washington, D.C: The World Bank.
18 Ibid
19
Fafchamps, M., & Wahba, J. (2006). Child Labor, Urban Proximity and Household
Composition.
19
family size. Also, the eldest children are more likely to inherit the farm because of the
skills they acquire as a result of starting to work in the farms young.
Additionally, parental education has an effect on their children’s attendance to
schools. Fafchamps and Wahba found that children whose parents received education are
far more likely to receive education as well compared to those with parents who have not.
This trend can be explained by both preference effect and an income effect due to the fact
that higher education results in higher wages and so the parent’s value of education is
significantly higher than those who have not received much education or none at all.20
Lastly, parents’ investment decision is also based on the employer’s choice. In a
study of malnutrition and child labor by Genicot, it was found that employers foremost
wanted and eventually required the entire family to work in order to hire any adult. Thus,
in order to keep the family from starvation, the parents had to send their children to work
along older members of the family.21
The parents’ decision to invest in their children’s schooling is determined by
uncontrollable variables like the job opportunities for both genders. The job opportunities
not only alleviate child labor but they also create social equality in attaining education for
both genders. Furthermore, parents’ decision to send a child to school depends on their
view of the child’s ability. Lastly, the intangible variable creates sibling rivalry because
20
Fafchamps, M., & Wahba, J. (2006). Child Labor, Urban Proximity and Household
Composition.
21 Genicot, G. (2005). Malnutrition and Child Labor. The Scandinavian Journal of
Economics, 107(1), 83-102.
20
the child with higher abilities gets a chance to learn in school and even get an easier task
and less hours of work.
Returns to Schooling/Education
In regards to returns to years of education, there are two opposing views. Ilahi and
his co-authors concluded that number of years in school is positively correlated with the
adult income. The study showed that child laborers who did not attend at all or received
very minimal schooling had higher odds of falling into the lowest income divisions of
poverty. Ilahi et al used a data set on adult earnings in Brazil. They found that “work
experience, years of schooling, and human capital attained per year of schooling” affects
adult earnings. They calculated the positive and negative effect to show that “early entry
to the workforce reduces lifetime earnings by 13% to 20%.” Study suggests that
implementing policies to force children to stay in school for a specific number of years
will reduce the number of people living in poverty. Additionally, they suggest an
alternative solution in which the government provides an income transfer to assist the
poor families on the condition that they send their children to school.22
A few studies have shown an opposing view. Ravallion and Wodon (2000) state
that child labor and schooling are not mutually exclusive. Furthermore, Patrinos and
Psacharopoulos (1997) found that they may be complementary activities. “Mincer (1974)
study found that work experience raises wage because human capital is generated through
learning by doing”. This puzzling conclusion can be explained by the phenomenon that
22
Ilahi, N., Orazem, P. F., Sedlacek, G. L., & World Bank. (2005). How Does Working
as a Child Affect Wage, Income and Poverty as an Adult?. Washington, D.C.: Social
Protection, World Bank.
21
occurs in rural area where school quality is poor. Moreover, the extra income earned by
the children can be later returned to the child at maturity giving them a boost in their
physical assets
Although there is evidence that education will increase adult wages, the families
are less willing to send their children to school because of the present reality. The parents
need additional income apart from themselves to sustain their household’s lives. The
findings support that returns to school may be a positive determinant in reducing child
labor in more developed and urban areas. On the contrary, returns to school is a negative
determinant for the families living in rural areas where education system is minimal.
Proximity of Schools
Fafchamps and Wahba also support Ilahi’s stance. They add that as long as the
child is in close proximity to the schools in urban areas, they are more likely to attend
school than those than live in rural areas because there are job opportunities, not in
agricultural sector that allows the children and adults to have higher returns to
education.23
Fafchamps and Wahba studied the relationship between child labor, urban
proximity, and household composition in Nepal. The proportion of students that attended
school drastically increased as the distance to the urban centers decreased. The number of
child laborers, works hours per day, and the dangerousness of work decreased as their
homes got closer to the urban centers. Overall in Nepal, the findings indicate that “urban
23
Fafchamps, M., & Wahba, J. (2006). Child Labor, Urban Proximity and Household
Composition.
22
proximity is associated with an improvement in child welfare.”24
“The main reason is that
rural children assist their parents on the farm and in house chores.”25
Although their
study’s findings cannot be applied globally, it gives insight to similar situations and the
related child labor phenomenon.
Debt Bondage
Debt in a household creates many difficulties and in worst case scenarios, it leads
to debt bondage. Debt bondage occurs in areas where monetary transfer and access to
credit markets doesn’t exist or is available for a very few. In present times, South Asia
has the most cases of debt bondage. Parents, who accumulate debt or are in need of a loan,
in essence sell themselves or their children for money. By doing so, the payment is
service to the loaner. The terms of service are typically unclear in regards to what
services will be rendered and how long the service will last. Due to this abuse, debt
bondages are sometimes passed down to the subsequent generations. The contract for the
terms of service is often not documented. Additionally, the interest rates associated with
the loans make the loans impossible to repay which consequently binds the subsequent
generations to debt bondage.
According to Basu and Chau, debt bondage is a result of a choice between income
benefit from promise of their children to service or sending a child to work with less
income. Although the choice is difficult, because of the desperate need for money, the
24
Fafchamps, M., & Wahba, J. (2006). Child Labor, Urban Proximity and Household
Composition.
25 Fafchamps, M., & Wahba, J. (2006). Child Labor, Urban Proximity and Household
Composition.
23
parents choose to receive extra income in exchange for their children’s service. However,
their choice that may be clear at the present times for the parents doesn’t show to be
creating more revenue or income in the long run, and so it creates an endless cycle of
poverty. The cycle of poverty has an adverse effect on the future generations as it
increases the debt year after year. Their study shows that once debt bondage has been
introduced in respective families, the trade sanction that was established to reduce child
labor is no longer effective.26
Effectiveness of Child Labor Regulations
Many countries around the world have implemented child labor laws and they
have been effective to the degree that child labor has been eliminated completely or
minimized to small number in agricultural labor. Yet, some countries were not able to
achieve that success due to other larger factors that determine child labor, such as the
existing poverty level with no opportunity to make more income or to attain credit. When
child labor seems or is the only way to sustain living, child labor regulations seem to be
disregarded. Employers and family members find ways to make ends meet even if that
means refusing to comply with the government law.
Another matter of child labor regulations is the different viewpoints towards
children working in lieu of attending school. The Western countries have found children
working in facilities such as the factories and other dangerous places to be wrong and
immoral. Thus, the shift in their views about child labor occurred. Yet, in other parts of
26 Basu, A. K., & Chau, N. H. (2004). Exploitation of Child Labor and the Dynamics of
Debt Bondage. Journal of Economic Growth, 9(2), 209-238.
24
the world like South Asia, dangerous workplace is not the most feared thought. They fear
children becoming lazy and idle, not learning the importance of work, losing sight of
what is beneficial for the society and possibility becoming vile and turning to crimes to
find means of living.27
Doepke et al studied the effect of child labor regulations implemented specifically
in United Kingdom. In his study, he focused on countries with high technological
progress. By tracing such countries, it puts attention on increasing number of jobs for the
educated or the skilled and it is not just a matter of openings but also the increased wages
as demand of workers increases while the supply of such workers are unmet. Doepke
concludes that these circumstances challenge the parents to have smaller families and
emphasis is placed on education to send the children to school because returns to skilled
labor is higher than the potential income child labor can bring in.
Doepke suggests that there are two conditions that must be met in order that child
labor regulations become effective. First, the government must find ways to reduce cost
of attending schools and second, the productivity of child labor whether in the household
or elsewhere must become less beneficial for the family. With increased returns to
education, child labor regulation will attain more support from the people and thus
making a nationwide shift of the view of child labor and education.28
27
Doepke, M., & Zilibotti, F. (2005). The Macroeconomics of Child Labor Regulation.
The American Economic Review, 95(5), 1492-1524.
28 Doepke, M., & Zilibotti, F. (2005). The Macroeconomics of Child Labor Regulation.
The American Economic Review, 95(5), 1492-1524.
25
Baland and Robinson suggest that in order for child labor regulations to work,
firms that do not practice child labor should receive subsidy from the government so that
firms will want to hire educated workers. A negative result from enforcement of
regulations is that the families that are considered rich will see a decrease in their wages
because the pool of educated workers will increase, building a higher demand for skilled
jobs.29
Unfortunately, in Brown and his co-author’s paper, they state that child labor is a
multi-dimension problem and thus establishing a child labor regulation or ban will be
ineffective. They need to find measures to “alter family and firm decision making prior to
a rise in income”30
through child labor.
Idleness of Children
In most child labor studies, education is considered as the alternative to child
labor. However, children can also be idle without school or work. In discussing the
matters of idleness, many studies analyze the effect of child labor policies. Deb and
Rosati suggest that because child labor laws prevent children from working, some
become idle. Idleness occurs from lack of work opportunities and lack of capital and
resources from parents to send their children to school.31
While most studies focus on
29
Baland, J., & Robinson, J. A. (2000). Is Child Labor Inefficient? Journal of Political
Economy, 108(4), 663-679.
30 Brown, D. K., Deardorff, A.V., & Stern, R.M. (2002). The Determinants of Child
Labor: Theory and Evidence.
31 Deb, P., & Rosati, F. C. (2002). Determinants of Child Labor and School Attendance:
The Role of Household Unobservables.
26
“two corner solutions (a child works only or study only)” and “an internal solution (a
child both studies and works)”, Deb and Rosati key in on a third corner solution in where
“children neither go to school nor work.”32
Their studies find that education and free time
are substitutes for each other and are altered as a result of changes in “income, wealth,
costs of and returns to education and other explanatory variables.”33
Globalization
The consensus of globalization is that it presents opportunities for developing and
developed countries to advance faster as a result of a vast array of exchanges that range
from ideas, products, and other views that are specific to each culture. Some earlier
studies have concluded that globalization in countries increase job opportunities with
higher wages, and as a result parents will foresee the benefits of education and eventually,
decrease the number of child laborers in the country.
In Eric Edmonds’ study on the effect of globalization on child labor, he concluded
globalization will lead to a decline in child labor due to the decrease in financial needs for
the families.34
In his case specific to Vietnam, he iterates that parents take advantage of
the increased wages for themselves to reduce child labor and furthermore, “many
globalization opponents and trade policy-makers advocate that higher income countries
employ trade sanctions to force domestic policies in poor countries to eradicate child 32
Deb, P., & Rosati, F. C. (2002). Determinants of Child Labor and School Attendance:
The Role of Household Unobservables.
33 Ibid
34 Edmonds, E. V. (2005). Does Child Labor Decline with Improving Economic Status?
The Journal of Human Resources, 40(1), 77-99.
27
labor. These trade measures likely lower the price of the exported good, so our results
suggest that sanctions could instigate more rather than less child labor.”35
Creating avenues for interdependence of nations and increasing exchange of
goods and services are the main functions of globalization. Globalization allows products
to be generally sold at a higher global market price, however, when trade sanctions are
put in place, it stops pushes the goods to be sold at a lower price. In doing so, it causes
wages to decrease and thus decreasing household income. Decrease in household income,
drives parents to send their child to work. Therefore, as long as globalization in a country
is free from the possibility of countries in better economic standing imposing trade
sanctions, globalization will lead to reduction in child labor over time.36
Chapter Summary
In summation, poverty and low income causes child labor. Parents consider many
different factors in deciding whether to send their children to school, such as the child’s
skills, child’s ability to attain a job, and the demand of the employer. Another important
factor in sending a child to work is the return to years of education; however, this is not a
reliable factor due to differing needs in the adult workforce. The proximity of school also
influences a parent’s decision because urban schools have better quality while rural
schools contribute a bare minimum to a child’s accumulation of human capital. Debt
bondage is a phenomenon that occurs where there are no credit markets or lack thereof.
35
Edmonds, E. V., & Pavcnik, N. (2002) Does Globalization Increase Child Labor?
Evidence from Vietnam. National Bureau of Economic Research.*
36 Edmonds, E. V., & Pavcnik, N. (2002) Does Globalization Increase Child Labor?
Evidence from Vietnam. National Bureau of Economic Research.*
28
The child labor regulations implemented by the government or the United Nations are
effective to an extent and without caution; regulations can lead to idleness of children.
Idleness is caused by lack of job opportunities and/or the lack of resources to afford
education. Globalization is seen as a way to increase job opportunities and thus
alleviating child labor; still, policies such as trade sanctions lower price of goods forcing
income to decrease and thus creating a need for children to work for the family. The next
chapter will delve more into the theoretical consideration and find the determinants for
child labor in Nepal and their effects.
29
CHAPTER III
THEORY
Macroeconomics of Child Labor
Doepke and Zilibotti’s model is of overlapping generations: young or old, and
with high or low skills sets . Adults probability of death is λ in each period.
There are two family sizes, large and small . Adults supply one unit of labor
while children provide units of unskilled labor. Children also have the option to go
to school and that accrues the cost of attendance of p. Children who worked have a
probability of in becoming a skilled worker while children who attended school have a
probability of . is the utility of an adult in the family with n children and skill
h. c is for consumption. The utility of an agent is given by:
and the maximization is limited to the budget constraint:
u(*) is an increasing, concave function. Ω is the state of economy, Ω’ is the state of
economy in the following period, is the wage for skill level h and e is the decision for
education. (1- λ) is the survival factor, and is the future utility discount factor.
30
Steady States with Endogenous Policies
Doepke et al found that steady state political equilibrium is achievable when there
is “high fertility, high incidence of child labor, and little political support for the
introduction of child labor regulation, or when there is low fertility, low (or no) child
labor, and wide spread support for CLR.” Through their study of the correlation between
fertility and child labor rates, they have found that they are indeed positively correlated
and thus the policies that must be implemented are not necessarily the ones directly
affecting child labor but those that target fertility preferences.
Introduction of Child Labor Regulation
In Doepke et al model, a transition to establishing a CLR in a country is possible
if technological advancement increase the wages for skilled worker which in turn
increases return to education. If the reward is significant, families’ preferences for a small
family will increase and they will educate their children which will cause a majority to be
in favor of the child labor regulations. This theory holds true because decreased
dependence on the children’s extra income for the family will shape the parents’ mindset
to send their children to school. CLR targets the family sizes and the introduction of CLR
does have a noticeable impact on the country’s child labor rate.
Under the assumption that capitalist supports CLR, the following observation can
be found. At first, introduction of CLR harms the capitalist due to children of big families
being removed from the labor force. However, the increased supply of skilled labor due
to CLR will benefit the capitalist with greater returns.
31
Doepke and Zilibotti’s explanation of their theory is that technological
advancement raises return to skilled labor, which is attained through education. Therefore,
it gives parents an incentive to send their children to school. Due to the fact that cost of
school can be a financial burden, parents will choose to have smaller family to have
enough resources to support their child(ren). They also suggest that a significant
reduction in child’s productivity or an increase in factors that affect fertility rates, will
lead to a smaller family size, which may cause parents to send their children to school
instead of having them participate in the labor market. However, there is a possibility that
child labor may disappear but debt bondage remains.
Debt Bondage
In an agrarian economy there are two seasons, lean and harvest. Lean season is
the time between the harvest seasons. During this time, the amount of food stored in a
household is severely diminished because they sustain themselves with the harvested
crops. These two seasons are in time, , where . Child labor is substitute for
adult labor in harvest seasons, “with each unit of child labor work equivalent to
amount of adult labor work.”37
During harvest season, adult wage and spot wage (adult
and child labor) can be written as:
(
) 38
37
Basu, A. K., & Chau, N. H. (2004). Exploitation of Child Labor and the Dynamics of
Debt Bondage. Journal of Economic Growth, 9(2), 209-238.
38 Ibid. This entire section on debt bondage is derived from Basu & Chau’s Exploitation
of Child Labor and the Dynamics of Debt Bondage from Journal of Economic
Growth.
32
The world price of agriculture, , directly affects the wage of the workers at time period,
. is the number of landlords competing to find employees from the same pool of
supply. is the endowment of land of the landlord. The output per land is denoted as
.
The supply of the agrarian labor market is made up of generations of households.
Each household supplies one unit of adult labor and it is inelastic, so the decision that is
made by the parent is how much of child’s time is spent in harvesting. Household utility
over a period of season is , and it is dependent on (i) consumption during the
seasons , (ii) the adverse effect of child’s time spent in harvest work ( ), and
(iii) inheritance from previous generation
( ) ( (
))
Where and are proportions that parameterize household disutility of putting child to
work and the appropriate discount factor, respectively.
For households that do not have access to markets, the budgets for consumption
for generation household are:
( )
This equation accounts for situations where no money is lent during the lean season
where there is no harvest activity. Additionally, it accounts for potential inheritance the
current household might receive.
33
Maximizing the utility function with respect to disutility of children, , and the
inheritance, , we get
(
)
The only scenarios in which child labor can be completely eliminated, is if the disutility
is significantly high or if child labor is comparatively inefficient. So mathematically,
(
) has to be greater than 1.
Consumption during harvest season with only adults working is
Then the spot harvest wage is
(
)
On the contrary, if children are working as denoted by , then the
consumption and transfers to the child can be described as
Then the total labor supply is comprised of both adult and children. Therefore, the most
effective labor supply is when both children and adults are working and the equilibrium
spot wage can be written as
(
)
34
Interlinked Transactions
An interlinked credit-labor contract between a household and a landlord includes
three terms:
1. The landlord offers the household a loan of amount to supplement lean period
consumption;
2. Household repays landlord amount of effective labor during harvest season,
regardless of which member, child and adult alike;
3. The household is limited to working elsewhere until the loan is repaid in full.
The contract gives the participating households subsidized lean season consumption:
( )
The maximum utility of child labor is
This means that as approaches , the household has a tendency to devote send
their children to work.
Participation depends on one’s ability to bargain with employers. Given the
former condition, they choose to participate if and only if
( )
35
The landlord has to decide how to maximize profit and formula that “maximizes wage
savings net of interest plus principal costs of the consumption loan in the lean season,
by choice of , with”
[ ] ( )
In terms of interlinked transactions, there are two crucial levels of transfer in respect to
where so that for all possible values of
1. , landlords do not engage in interlinked transaction so child labor is
nonexistent and the market wage is .
2. ( ], landlords engage in interlinked transaction so child labor is still
nonexistent so the market wage remains at .
3. , landlords engaged in interlinked transactions and child labor is
existent. Therefore market wage is less than .
Welfare Effects
From earlier discussion of participation constraint, each following generation’s
welfare worsens as debt bondage is created. There are two ways in which received
inheritance affects the current household. First is it has a direct impact on the minimal
level of consumption because the household will not turn to landlords for loans. Second
effect is it decreases the spot market wages because the transfer to the current generation
could have occurred from the loan of the previous generation. As a result, the adult and
the children will be forced into labor, increasing the labor supply and decreasing the
wages.
36
Trade Sanctions
Basu and Chau’s proposition on trade sanctions in regards to child labor states: “a
trade barrier that adversely affects the price level of the agrarian output has
1. An impact effect that is effective in temporarily deterring the incidence of bonded
child labor so long as ( ) , and
2. A dynamic effect that offsets the impact effect, leaving the steady state incidence
of bonded child labor strictly unaltered, but the steady state welfare of the
household strictly lower than when free trade prevails.”
Their proposal for eliminating child labor is to find ways to reduce the imperfection in
the credit market.
37
CHAPTER IV
THEORETICAL ANALYSIS
Household’s Allocation of Child’s Time in School and Work
Parents and children make up a household. The parents spend amount of time at
work and earn . The children earn and for simplicity, we assume they spend
time at work. So the household’s total income can be represented as
. The household is faced with a budget constraint because they cannot
consume more than they make. Given that the price of the goods is , their budget
constraint is
A household has a utility function of . In the utility function, c is the
household consumption and s is the child’s schooling. The household will benefit the
most when this utility function is maximized. A higher utility can arise from two sources,
an increase in consumption and the increase the child’s time spent in school. The
household’s increase in consumption increases utility because consuming more is
preferred. Utility also increases when the child goes to school because higher education
equates to high wages and because we assume that the parents doesn’t want their children
to be working, increase in the time spent in school decreases the working time.
38
FIGURE 4.1
HOUSEHOLD BUDGET CONSTRAINT AND INDIFFERENCE CURVE
From the graph (Figure 4.1), we can see that the two extreme cases consumption
in relation to the child’s time spent in school. When the child is only working, the
consumption is
. When the child is at school full-time, the household’s
consumption is
.
Effects of the Increase in the Parameters
To create a policy to eliminate child labor, we must understand how the changes
to different factors of the budget constraint function affect the family’s decision regarding
consumption and child’s schooling. The three scenarios we will examine are the increase
in adult wage, the increase in child wage, and the increase in the price of goods.
39
FIGURE 4.2
INCREASE IN ADULT WAGE,
When the adult wage increases, the household income increases. The budget
constraint shifts upward. The income effect creates an increase in consumption as well as
time spent in school. Because of the increase in schooling, children’s time spent in work
will decrease. (Figure 4.2)
FIGURE 4.3
INCREASE IN CHILD WAGE,
40
When the child wage increases, the household income increases when the child is
completely working and remains the same when the child is in school full-time. The
increase in child wage leads to increased consumption but the time spent in school
decreases. Child’s time in school decreases because the opportunity cost to attend school
increases as the child wage increases. (Figure 4.3) Additionally, it is possible that due to
the increase in the household income, consumption and the child’s time spent in school
also increases (not shown in Figure 4.3).
FIGURE 4.4
CHILD LABOR SUPPLY AND WAGE RATE
To illustrate the two opposing outcomes, we compare the child labor supply to the
wage rate. We can apply the theory of backward-bending supply curve of labor to child
labor. At a low wage rate, an additional unit of work produces a higher marginal utility
than the next unit of work. At a high wage rate, as wage increases, the child can work less
to make equal contribution to the household income. (Figure 4.4)
41
FIGURE 4.5
INCREASE IN PRICE OF GOODS,
When the price of goods increases, the overall household budget constraint
decreases. As a result, the consumption and time spent in school decreases. As a result,
the child labor increases. (Figure 4.5)
Laws of Nepal and its Effect on Child Labor
“According to the ILO, Nepal's law establishes a minimum age for employment
of children at 14 years. The Constitution of Nepal stipulates that children shall not be
employed in factories, mines, or similar hazardous work. The Constitution also forbids
slavery, bonded labor, and the trafficking of individuals” (ILAB).
The Nepalese child labor law theoretically removes all children under 14 years of
age from the labor force. In actuality, the law does not remove children from the work
force because a vast majority of children under the age of 14, work in their homes doing
household chores or working in the farm with their parents. The effect of this child labor
law is increased incentives for parents to send their children to work. By setting a
42
minimum age requirement, the child labor supply decreases to a small degree and as a
result the child wage marginally increases. As shown in Figure 3, when the child wage
increases, time spent in school decreases which means an increase in the time spent
working.
Additionally, the firms’ demands for child labor will decrease because using child
labor would mean illegal practices. As a result, there will be a decrease in the number of
children in the labor force and also a decrease in wage rates. Due to the fact that these
laws cannot be completely established because of the lack of resources to enforce and
monitor the law, not all firms will be obeying the law. As a consequence, the children
that still remain employed by the companies will face a lower wage. Theoretically, lower
child wage would drive the parents to send their children to school because of the lower
opportunity cost. However, that is not always the case because the current need for
income for the household’s sustainability is great that the children are pushed to work.
Child Education Law
“Education is not compulsory in Nepal. The government has a stated policy of
providing free education through the 6th grade, but this policy reportedly is not
implemented” (ILAB).
The Nepalese child education law theoretically gives all children an opportunity
to attend school. Yet, the households are still obligated to pay for other school expenses.
By lowering the cost of school, the opportunities are given to parents to send their
children to school without having pay for them as an investment. Like the child labor law,
if the parents send their child to school, the child labor supply decreases to a small degree
43
and as a result the child wage marginally increases. As a result, those children who
remain working will earn higher wages. Because of the increased wages, in the long run,
the children will most likely enter or return to child labor pool because of the increased
benefit for the household. Overall, the child labor supply will decrease and the child wage
will increase but the problem of child labor will still continue to exist.
FIGURE 4.6
EFFECT OF FREE EDUCATION
Household Loans
According to the Nepal Living Standard Survey (NLSS 2011), 65% of the
households have received some type of loan39
. Only 40% of the households in
Kathmandu Valley had loans while over 68% of the households in the rural areas did.
The most common sources of loans were their relatives (51%), bank/financial institutes
(20%), and money lenders (15%). On average the loans were received for personal uses
(43%), household consumption (30%), and business or farm use (26%). It is important to
39
Nepal Living Standard Survey 2011, Central Bureau of Statistics, Thapathali,
Kathmandu, Nepal
44
note that in the urban areas, business/farm use makes up 33.8% of the loans while only
24.9% of the households in the rural areas do. Additionally, the urban areas 20.5% of the
households borrow it to supplement their household consumption while 32.5% in the
rural areas do. Sometimes loans are borrowed with some type of collateral. Generally,
their land, house, or property is the collateral. NLSS’s data shows that over 30% of the
loans in the urban area include collateral while less than 19% does in the rural area.
There are a couple statistics that should be looked into detail. One is the
difference in the purposes of the loans. In the urban area, business or farm use surpasses
the household consumption needs and vice versa in the rural area. The other is the greater
proportion of collaterals used for loans in the urban area. Yet, it is the urban areas that
send the greater proportion of children to school than the rural areas. When children
between the ages of 6 and 24 were surveyed, 4.3% of the children from the urban areas
never attended school while 9.7% from the rural areas didn’t. The biggest reason for the
lack of attendance was because the “parents did not want” their children to. The next
biggest reason in the urban area was because the children were “not willing to attend”
and then to “help at home.” In the rural area, it is vice versa. The fourth reason was that
school was too expensive with 8.6% from the urban areas and 7.2% from the rural areas.
Although the households from the urban area are more likely to send their children to
school, why parents refuse to send their children to work should be questioned. Also, an
examination of how the imperfect credit market affects child labor is needed.
45
Loan Sources and Child Labor
There are two types of institutions that lend money with interest rates: a formal
institution such as a bank or a financial institute; an informal institution such as the
money lenders. The money lenders charge higher interest rates but loans from the money
lenders are much easier to obtain for the households with lower income. The trend in data
can be observed in Nepal Living Standard Survey 2011:
TABLE 4.1
INTEREST RATES OF FORMAL INSTITUTIONS
Consumption
Quintile
Bank/Financial
Institutes
Money
Lenders
Poorest 9.0 22.2
Second 13.5 21.7
Third 18.2 15.2
Fourth 20.8 13.2
Richest 34.0 6.6
Access to Credit Market and Child Labor
To analyze the effects of a credit market, a two period model will be used. In
period one, the parents decide how much their child will work. The parents are able to
borrow loans, with interest rate of if they choose. As a result, they have the
following consumption levels for each period:
46
is the child wage function in respect to the time spent in school such that
The wage function is increasing and concave because increase in education generally
leads to higher wages. is the expense of schooling. The real future value, , is
multiplied by the second utility function to account for inflation. Thus the household
faces the problem to maximize
The Lagrangean is
The first order condition is
If we assume that the family will send their children to school, we get
and , so we get
47
FIGURE 4.7
FULL-TIME SCHOOL ATTENDANCE DUE TO LOW OPPORTUNITY COSTS
These are the conditions necessary to have children enrolled in school full time. In
this scenario, the household will send their children to school if the future earnings due to
schooling are greater than the opportunity cost. This shows that the decrease in child
wage in the first period, expense for schooling, or interest rate will negatively impact the
child’s time spent at school. (Figure 4.7)
If we assume the parents will send their children to work with no schooling, we
get and , so we get
48
FIGURE 4.8
NO SCHOOL ATTENDANCE DUE TO HIGH OPPORTUNITY COSTS
In this case, the child will not attend school at all if the opportunity cost of
earning one more unit of education is greater than the future earnings. This shows that the
increase in child wage in the first period, expense for schooling, or interest rate will
negatively impact the child’s time spent at school. (Figure 4.8)
If we assume the parents will neither send their children full time to school nor to work,
we get
49
FIGURE 4.9
PARTIAL SCHOOL ATTENDANCE
In this case, the children are not bound to one extreme. There is an optimal
solution in which the benefit and the cost of schooling are equal. This is the case because
if growth rate of the wage function is higher than the opportunity cost, the household can
send their children to school to be better off. However, if the growth rate is smaller, the
household will be better off by having their children work more. (Figure 4.9)
Loan, Loan Rates and Child Labor
The households in Nepal have a wide range of lenders to borrow from. However,
depending on the sources, their interest rate can vary greatly. The significance of the
differing interest rates on loans can impact the families to make different decisions,
whether to send their children to school or work. The parents’ value of future income
depends largely on the interest rates. If the interest rate is low enough that the future
income is near the present income lost to send their children to school, the parents will do
so, even at the cost of borrowing money. However if the interest rate is too high that
50
sending the child to school is too expensive, the parents will most likely refuse to send
their child to school. The parents’ value of the future income dependent on the interest
rates can be defined as
From the equation, it is in the best interest for the parents to find the lowest
interest rates, ideally if it is possible. This choice can be observed in the Nepal
Living Standard Survey 2011 with the greatest source of loans from their relatives. When
the Nepalese borrow from their family members, there are no interest rates. Although the
specific interest rates are unknown, the next most common source of loans is the bank.
Higher proportion of families in the rural area borrows from money lenders compared to
those from the urban area. Families borrow from the money lenders who have higher
interest rates solely because banks and financial institutions require high levels of income
or other requirements that are difficult for low income families to meet.
The optimal amount of loan, , the households borrow is equal to
When the family can borrow the amount they need at the interest rate that maximizes
their utility, the parents will send their children to school.
51
Indebtedness and School Enrollment
TABLE 4.2
AMOUNT OF LOANS AND SCHOOL ENROLLMENT
Consumption
Quintile
Amount of
Loan
($)
School
Enrollment
(%)
Poorest 29,360 17.2
Second 32,844 21.8
Third 38,962 26.0
Fourth 68,667 31.7
Richest 322,116 41.5
FIGURE 4.10
THE LORENZE CURVE FOR SCHOOL ENROLLMENT
0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100
Cum
ula
tive
% S
choo
l E
nro
llm
ent
Cumulative % Amount of Loan
Cumulative %
School Enrollment
Equality
52
The Lorenz curve shows that the poorest quintile of the households with loans only
account for 12% of the total school enrollment of children. While the highest quintile of
the households with loans account for 30% of the total enrollment of children. This
inequality shows that the amount of debt and low household income does have an effect
in the parents’ decision to send their children to work or school.
53
CHAPTER V
CONCLUSION
The aim of this thesis is to study the current state of child labor in Nepal and to
find potential ways to reduce child labor. There is an extensive amount of theoretical and
empirical research done on child labor. However, there are a limited number of literatures
on child labor in Nepal. There are few possible interventions to reduce child labor. First
suggestion is to increase the adult wage so that the new equilibrium results in increased
consumption and an increase in the time children spend in school, more schooling means
less work hours. Second suggestion is to pass a law so that the interest rates of loans from
the financial institutions can stay relatively low. In turn, this will cause the parents to be
more inclined to send their children to school because the opportunity cost for foregoing
children’s time spent at work is low. Third suggestion is to educate the parents of the
benefit years in school can make in their child’s life.
Child labor in Nepal requires much attention and research but there is a limited
amount of policing that occurs in the country. A shortcoming of this study is that there
was no empirical data or a primary source. Therefore, a recommendation for further
research would be to gather empirical data and/or visit Nepal and interview the natives to
get a perspective on why the parents continue to send their children to work instead of
school. A further research on several countries could be interesting since every country is
unique including the United States. Comparing child labor in a developing country to a
54
developed country could be fascinating. In that study, if the first and third world countries
share the same motivating reasons for child labor, then much more action could be taken
from the government to reduce child labor. However, if there are different reasons for the
two countries then similar course of action could be taken to reduce the extreme number
of child labor in the less developed countries.
55
CHAPTER VI
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