Working Paper: NBER ID: w10347
Authors: Dirk Krueger; Jessica Tjornhom Donohue
Abstract: In this paper we construct a dynamic heterogeneous agent general equilibrium model to quantify the effects of child labor legislation on human capital accumulation and the distribution of wealth and welfare. Crucial model elements include a human capital externality in the market sector, an informal home production sector in which child labor laws cannot be enforced, uninsurable idiosyncratic income risk, borrowing constraints, and endogenous wage and interest rate determination in general equilibrium. We calibrate the model to US data around 1880 and find that the welfare consequences for individual households of a transition to policies that restrict child labor or provide tax-financed free education depend crucially on the main source of a households' income. Whereas households with significant financial asset holdings unambiguously lose from any government intervention, high-wage workers benefit most from a ban on child labor, while low-wage workers benefit most from free education. Based on a utilitarian social welfare function, the introduction of free education results in substantial welfare gains, in the order of 3% of consumption, mainly because it leads to higher human capital accumulation. A child labor ban, in contrast, induces (small) welfare losses because it reduces income opportunities for poor families without being effective in stimulating education attainment.
Keywords: Child Labor; Human Capital; Legislation; Welfare; Education
JEL Codes: I28; J22; D31; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Child labor bans (J82) | welfare losses for households with significant financial assets (D14) |
| Child labor bans (J82) | decline in capital-labor ratio (J24) |
| Child labor bans (J82) | decline in returns to capital (E25) |
| Child labor bans (J82) | increased wages for high-wage workers (J38) |
| Tax-financed free education (I22) | welfare gains (D69) |
| Tax-financed free education (I22) | human capital accumulation (J24) |
| Child labor bans (J82) | minimal welfare improvements for poorer families (I38) |