child labor in nepal a thesis presented to the faculty of

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


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


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


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


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.


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


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


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


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


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


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.


28 Doepke, M., & Zilibotti, F. (2005). The Macroeconomics of Child Labor Regulation.


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?


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


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

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child labor in nepal a thesis presented to the faculty of

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