adult and child labor are substitutes Multiple equilibria model no child labor

Adult and child labor are substitutes multiple

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adult and child labor are substitutes Multiple equilibria model : no child labor N , little child labor Sl , high child labor Sh . Subsistence consumption level s : below this level there will be a need for children to work. Against economic theory; wages go down; people now have to work more (to make up for the low wage). Now the supply curve is downward sloping. E2= no child labor. E3 = child labor, still subsistence s is reached. People cannot change the wages, the government can say; ban child labor, move the economy back to E1. Assumption; there will be less labor and you will need to pay people more to attract enough labor (not sure if this is realistic). As soon as you pass E3 it will be easy for employers to lower wage; there will be even more demand, move to E2.. E3 is therefore not a stable equilibrium. Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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Social norms ± can also lead to multiple equilibria If there is a lot of shame in letting your child work; harder to do it. But if everyone sends their children to work it is not such a bad thing. Conclusion: Banning can be appropriate instrument in general equilibrium model Wage effect might be too strong Social norms can also lead to multiple equilibria General conclusions - Good schooling, free school meals - Compulsary education: monitoring - ‘Work-and-school’, poor countries - Higher adult incomes (decreases child labor - Ban hazardous work; total ban may work in better-off countries - Import restrictions are sector specific, may hurt children - Need a push from outside to make the whole economy change - Enforce laws for safety, minimum benefits etc Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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HC 8. Credit Why is credit important ? - Rural poor: low incomes, low savings/assets, income fluctuations/shocks, agricultural production takes time Liquidity problems, need money to smooth consumption and production Demand for credit : - Fixed capital : land, machinery, buildings - Working capital: cash needed for financing inputs - Consumption credit : needed for survival after shocks Is access to credit really a constraint to development? If I had more money I was richer and credit being a constraint. Is it profitable to borrow money to expand your business? Then it is a credit constraint. There is only a credit constraint if there is actual economic growth due to investments. Who provides credit? Formal lenders (banks, commercial banks), informal lenders (moneylenders, family, traders). Vietnam example Many loans in the informal sector, less so as the country developed (more formal loans). Empirical observations - Sizeable gap between lending rates and deposit rates within the same sub economy - Extreme variability interest rate - Production and trade finance are the main reasons giving for borrowing - Credit limits: rich people borrow more at lower interest rate - Many people want to borrow at formal interest rate - Very high share of credit transactions between friends / family, many without explicit interest - Low formal interest rates, high moneylender rates Policy questions - Should everyone get credit?
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