Chapter II: The Economic Cost of Child Labor
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The costs of child labor are many. To children who are enslaved, prostituted, forced to engage in illicit activities or very harmful work, the costs of child labor start with the suffering they endure in their daily lives. For working children more generally, the costs of child labor often include giving up the opportunity to go to school. To the extent that working leaves little or no time for school, the economic cost of child labor can, in part, be measured in terms of the forgone economic benefits of education. For a full consideration of child labor, the costs of children working need to be weighed against the possible benefits. Child labor does provide some income to children and their families. The evidence in this chapter, however, makes it clear that in most instances these economic benefits are overshadowed by the costs associated with not going to school. This chapter discusses how children are generally better off over the course of their lifetimes if they pursue education while young. It also discusses the benefits of education not only to the individual child but to society, and explores the economic benefits of education to a country’s economy. Finally, the chapter suggests that international trade provides a mechanism by which the increased enrollment of children in school and a decreased level of child labor in one country can also benefit the countries with which it trades. The emphasis throughout most of the chapter is on summarizing the main theories and empirical studies. A more detailed discussion of both is provided in Appendix A.
Literacy and basic numeracy are two of the most fundamental tools that all children need to develop in order to reach their full potential. There is no better way to work towards achieving this goal than by making sure that children have the opportunity to go to school. Schooling is vitally important to the development of young children. It prepares children for the future and helps them as adults to make informed decisions for themselves and their families, and to play productive roles in society. In addition to the obvious moral arguments for sending children to school instead of work, there is a strong economic basis for supporting a child’s right to education. Economic theory treats time spent in education as an investment in a child’s future productivity and earnings potential. The basis of this theory, known as the Theory of Human Capital, is that by spending time and money in the present to pursue an education, individuals will be more productive and receive higher income in the future.1 The key implication is that through education families can make an investment in their children that will pay dividends throughout the rest of their lives. 1. The individual benefits and costs of education As with any investment, there are certain basic economic benefits and costs that parents generally consider in deciding whether or not to commit their money and their children’s time to education. From a financial perspective, the decision is based on whether future rewards from schooling are expected to be high enough to justify current sacrifices. (See Box II-1 for a discussion of the implications of parents acting or not acting in their children’s best interests in making decisions about work and school.) The sacrifices or costs incurred by an individual child or family when a child goes to school can include both out of pocket expenses for such things as tuition, books, school uniforms, transportation and supplies; and the income forgone because a child is in school rather than working.2 These costs may be considered “up front” investments. The benefits take the form of higher earnings received over the course of a lifetime by children who become educated. If a family believes that these long term benefits are high enough to cover the up front costs, education will be seen as a profitable investment, and children are more likely to go to school. In general, most studies agree that the individual benefits of education exceed its costs. A survey of 162 studies, covering more than 70 countries and spanning all levels of economic development, found that in 87 percent of the studies, the typical individual who receives a primary education earns more than enough to cover the upfront costs of their schooling. These studies imply that the average child almost anywhere can expect to profit from pursuing an education. (See Appendix A for details on the methodology supporting these assessments.)
2. The social benefits and costs In addition to the costs and benefits that accrue to individuals from education, there are costs and benefits to society. For example, the costs of many children’s education is at least partly financed by society in the form of public schooling. The total social cost of educating children—i.e., the total costs of their education regardless of who pays for it—should include the sum of the costs paid directly by the individual children or their families plus the costs borne by the rest of society in the form of public schooling or other subsidies to education.3 Similarly, the total social benefits of educating children equal the sum of the benefits that accrue individually to the children and their families plus benefits to society that arise from the interaction of educated individuals. Over the long term, investments in children’s education may be associated with:
But the social benefits must be larger than the social costs of education for society as a whole to be better off. Within the labor market, the removal of children from work may also provide a spillover benefit in the form of higher adult wages for the workers with whom the children might be competing if they were in the labor market.5 Among other things, this effect depends on the degree to which children may be substituted for adult workers, and the relative sizes of the child and adult labor forces. In comparisons of social costs and benefits of education, social costs are generally easier to measure because calculating them involves simply adding public expenditures on education to total individual expenditures on education. It is far more difficult to assign a monetary value to many of education’s social benefits. For this reason, most studies that seek to compare the social costs and benefits of education actually end up comparing the sum of the individual benefits against the social costs, ignoring social benefits. However, even though these calculations underestimate the total social benefits of education, it is still usually the case that the benefits that are measured outweigh the social costs (see Appendix A). This is enough to conclude that most societies are better off when their children are educated. If all the social benefits could be measured, the difference between benefits and costs would make an even stronger case for education.6 (Box II-2 explores further the implications of these conclusions.)
C. Education and Macroeconomic Growth As individual citizens become more productive, the average level of productivity and income in an economy should increase. Research has found that education makes workers more productive and leads to higher levels of income for individuals. As this suggests, education should also be related to improved macroeconomic performance, for example, in the form of higher levels or growth rates, or both, of per capita income at the country level. In fact, there may be a virtuous cycle of greater investments in education leading to higher economic growth which in turn provides financial support for even greater investments in education. There may also be a vicious cycle in which inattention to education ensures that a country remains poor. The histories of East Asia and Latin America may provide illustrations of how a virtuous cycle and a vicious cycle can work. Since the late 1960s and early 1970s, several East Asian countries have invested in education as a development strategy. By making educational investment a development priority, these countries sought to prepare the average East Asian worker to contribute more productively in the workplace and to adapt better to new technologies. On a macroeconomic level, more productive East Asian workers may be responsible for the region’s superior economic growth. Completing this virtuous cycle, superior economic growth has, in turn, encouraged greater investments in education in East Asia. Access to education has also become more equitable in East Asia, both along income and gender dimensions.7 By contrast, a vicious cycle may have been at work in areas of the world such as Latin America. In Latin America, relatively poor economic growth performance has been explained by some researchers as resulting, in part, from income inequality and a record of limited and unequal access to education.8 Debate among economic researchers continues on the best method for measuring directly the effect of education on macroeconomic performance.9 Single country studies show that in almost every case education makes a positive contribution to growth, but the results of cross-country comparisons are mixed. Still, the majority of these cross-country studies have found some positive relationship between education and economic growth. The main issue over which researchers disagree is exactly which aspects of education affect economic growth. Evidence from some studies suggests that the level of education held by the members of a country is directly associated with economic growth. Others present evidence implying that economic growth is caused by increases in the levels of education individuals achieve. Still others demonstrate the existence of threshold effects: a certain amount of education needs to be obtained by the population before growth can be expected. Another group of studies concentrates on the question of identifying which of primary, secondary, or higher levels of education are more important to growth.10 In summary, it is still too early to declare that a consensus has been reached on the precise channel through which education affects macroeconomic growth. As explained further in Appendix A, the issue is not that most experts think that the relationship between education and growth is negative–most believe that education spurs growth. Rather, much of the confusion relates to technical issues of choice of data, methodology, or both. That is, the measurement of the benefits and costs of education at the macroeconomic level is not nearly as well understood as the measurement at the individual level (see Box II-3). For this reason, the strongest intellectual foundation for expecting education to spur economic growth is that education benefits each person individually, so it must benefit the collective of individuals that is society.
D. The Effect on Trade of Ending Child Labor and Promoting Education There is strong evidence, much of it discussed in this report, that education is an important determinant of individual income levels. Empirical evidence suggests that the return to education is particularly strong at the primary-school level—the level of education most likely to be hampered if children are pressed into full-time work. The relationship between education and income seems likely to hold at the macroeconomic level as well. Ending child labor, and providing meaningful alternative educational opportunities, will increase the future welfare of these individuals and should also have important long-term benefits for development. As a country takes effective steps to promote its development—in part, by ensuring that children grow into productive adults—this can have beneficial effects that extend beyond the home country. Trading partners that enjoy access to more stable and efficient economies, both as exporters and importers, can benefit as well. By and large, the empirical trade literature shows that similar levels of national income and geographic proximity are significant factors in explaining trade flows between any two countries.11 For the United States, some simple statistics bear this out.12 Roughly two-thirds of our trade is with other member countries of the Organization for Economic Cooperation and Development (OECD), a group of 29 of the world’s most industrialized and wealthiest nations. Although non-OECD countries account for the remaining third, the 48 least developed countries account for less than one percent of the total. Indeed, a striking empirical regularity in trading patterns of the United States is that our trading partners tend to be countries that are industrialized or developing rapidly.13 It should come as no surprise that developed countries, which tend to have larger consumer markets than poorer countries, tend to trade predominantly with other developed countries. First, trade can be especially beneficial when it helps countries reap the benefits of producing on a large scale. For some goods the average cost of production falls as more of the good is produced—hence the larger the market, the lower the cost. This gives firms an incentive to seek out foreign markets, especially large markets, to reach as many customers as possible.14 Second, and perhaps more fundamentally, countries that lack adequate physical, financial and appropriately educated or trained human resources to develop basic infrastructure and technical capacity, may face difficulties gaining access to international markets. At the same time, trade itself can help countries obtain these resources. In general, trade promotes economic growth and enhances living standards around the world.15 In the United States, our export sector provides vibrant business and work opportunities, often at higher than average wages; the importation of goods and ser- vices allows U.S. residents to choose from a wider range of products at lower cost.16 International interest about child labor thus properly extends beyond shared concern for the welfare of children. As countries end child labor and improve education and long-term productivity—in short, when countries increase their levels of development—they also create economies that can make stronger contributions to the world economy. In turn, these countries are more likely to be become active and productive trading partners. The vast majority of empirical studies reviewed for this report suggest that, regardless of a country’s development circumstances, education is a profitable investment in the future of an individual child. This conclusion holds most strongly when considering those benefits and costs that accrue to the individual directly, but it also holds if other “social” costs, such as the expense of public education, are included. There is also good reason to believe that education of an individual child yields benefits that spillover to members of society beyond the child and the child’s family. The existence of these social benefits, and the presumption that they imply that the benefits society enjoys from education exceeds the sum of the benefits enjoyed by each child educated, provides a clear rationale for public interest and intervention in encouraging education. Public schooling is one policy that reflects this interest; compulsory schooling laws are another.
Thus, it is possible to say that education of children is generally a profitable investment for individual children, the societies in which they live, and for the world. The logical question then is: why do so many children work instead of attending school? As the next chapter shows, for many children and their families, real-world factors present significant barriers to making the choice for schooling over work. 1 The basis for this theory stems from T.W. Schultz, “Investment in Human Capital,” American Economic Review, 51 (1) (March 1961) 1-17 ; and Gary S. Becker, Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education (New York: Columbia University Press, 1964). Although numerous extensions and modifications of the theory have been pursued, the basic decision-making process wherein an individual treats education as an investment and assesses whether the return justifies the investment is always the same. See Appendix A for a broader discussion on the Human Capital Theory. 2 “Income” can be earned in cash or kind. It includes monetary payments, goods and services produced by the child for the direct use of the child or family, or for barter for other goods and services. 3 George Psacharopoulos, “The Opportunity Cost of Child Labor: A Review of the Benefits of Education” (Washington, D.C.: Bureau of International Labor Affairs, 1999) 44, unpublished (document on file) [hereinafter “Benefits of Education”]. 4 B. Wolfe and S. Zuvekas, “Nonmarket Outcomes of Schooling,” International Journal of Educational Research 27 (6) (1997) Table 1. 5 K. Basu and P. H. Van, “The Economics of Child Labor,” American Economic Review, 88 (3) (1998) 423. 6 Empirically, however, we do not know if they would really translate into monetary benefits. 7 N. Birdsall, D. Ross, and R. Sabot, “Education, Growth and Inequality,” in Pathways to Growth: Comparing East Asia and Latin America (Washington, D.C.: The International Development Bank, 1997) 124. 8 N. Birdsall and J. L. Londoño, “No Tradeoff: Efficient Growth Via More Equal Human Capital Accumulation,” in N. Birdsall, C. Graham and R. H. Sabot (eds.) Beyond Tradeoffs: Market Reform and Equitable Growth in Latin America (Washington, D.C.: The Brookings Institutions, 1998) 126. 9 See Appendix A for more details and specific citations. 10 There is even a minority, but well known, group of studies that finds that increases in education may have a negative effect on growth. 11 See Simon Evenett and Wolfgang Keller, “On Theories of Explaining the Success of the Gravity Equation,” National Bureau of Economic Research Working Paper #6529 (Cambridge, MA, April 1998) 1, 26. 12 See Council of Economic Advisers, “America’s Interest in the World Trade Organization: An Economic Assessment,” November 1999 (http://www.whitehouse.gov/WH/EOP/CEA/html/wto/WTO-Final.pdf) 10, 33. 13 Elhanan Helpman, “The Structure of Foreign Trade,” Harvard Institute of Economic Research, Discussion Paper Number 1848 (Cambridge, MA, October 1998) 27, provides a more general view of trade patterns, “developed economies trade mostly with each other rather than with less-developed countries, and… trade within the group of less-developed countries is only a small fraction of total trade (about 15%).” 14 Economic Report of the President 2000 (Washington, D.C.: United States Government Printing Office, 2000) 214.
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All of these benefits
contribute to an improvement in the well-being of a country. In effect, all people (even those who do not
to go to school) can benefit from living in a better educated society.
As countries end child labor
and improve education and long-term productivity—in short, when countries increase their levels of development—
they also create economies that can make stronger contributions to the world economy. The chapter suggests
that these countries are more likely to be become active and productive trading partners, which could both
expand opportunities for workers and firms involved in the export of goods and services
from the United States, and make available a wider variety of goods and services
to be consumed at low cost by U.S. consumers.
