Shadow Wages and Child Labour Supply in AgriculturalHouseholds in Nepal
DPhil ConferenceUniversity of Sussex, Brighton
Marinella Leone
12 November 2010
Shadow Wages and Child Labour Supply in AgriculturalHouseholds in Nepal
1 Aim and Motivation
2 Literature review
3 Theoretical Framework
4 Empirical Strategy
5 Empirical Analysis
6 Conclusion
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 2 / 22
Aim and Motivation
Aim
Analysis of child labour in the agricultural sector.
Estimate the monetary contribution of child labour to family farms:shadow wage.
Assess whether children work on the farm because they are propelledto do so by poverty or for other reasons: income or substitutioneffect?
Analysis conducted on agricultural households in Nepal using NepalLiving Standard Measurement Survey (NLSS 2003/04).
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 3 / 22
Aim and Motivation
Motivation
Limited attention to child labour in agriculture, though 132 millionchildren 5-14 years old around the world work in agriculture (70% oftotal child labour, ILO).
Child labour in Nepal is mostly prevalent in the agricultural sector,mainly as self-employed on households’s farm.
Agriculture in Nepal accounts for 40% of GDP and 80% of populationwork in some agricultural activities.
Understand precise role of poverty: recent evidence shows thatchildren work on family farms not only for poverty reasons but, underspecific conditions, due to existence of market imperfections.
Knowledge of whether and how children contribute to family incomeand assessing how their supply reacts to changing economicconditions becomes particularly relevant from a policy perspective.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 4 / 22
Literature review
Literature review
Mixed evidence on the role of poverty in child labour (Basu and Van,1998 ⇒ seminal paper; Patrinos and Psacharopoulos, 1997; Ray,2000; Sedlacek et al., 2005).
More recent studies focused on identifying demand/supply factors andincome/substitution effects (Kambambhati and Rajan, 2006;Edmonds, 2007; Kruger et al, 2007; Bhalotra, 2007).
Child labour in agricultural households (Mueller, 1984; Bhalotra andHeady, 2003 ⇒ wealth paradox).
Test of poverty hypothesis on farm child labour (Dumas, 2007; Basuet al., 2010) ⇒ reduced form models.
Shadow wages and labour supply estimated only for adults (Jacoby,1993; Skoufias, 1994; Barrett et al., 2008).
Attempt of estimation of child shadow wage (Menon et al., 2006 ⇒dual side).
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 5 / 22
Theoretical Framework
Theoretical Framework
General agricultural household model (Jacoby, 1993).
Farm household solve following maximisation problem:
max U(C , li ;Z) (1)
subject to
C = pΘ(Fi ,H,S;A)− whH + wiMi + V (2)
Ti = li + Mi + Fi
0 ≤ Mi ≤ Mi (3)
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 6 / 22
Theoretical Framework
Theoretical Framework
From FOCs we get:
∂U/∂li∂U/∂C
= wi −µ1iλ
+µ2iλ
= w∗i (4)
p∂Θ
∂Fi= wi −
µ1iλ
+µ2iλ
= w∗i (5)
p∂Θ
∂H= wh (6)
where w∗ is the shadow wage.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 7 / 22
Theoretical Framework
Theoretical Framework
If 0 ≤ Mi ≤ Mi then µ1i = 0, µ2i = 0 and wi = w∗i ⇒ model is
separable.
If either Mi = 0 or Mi = Mi ⇒ model is non-separable:
∂U/∂li∂U/∂C
= wi +µ2iλ
= p∂Θ
∂Fi= w∗
i > wi if Mi = 0 (7)
∂U/∂li∂U/∂C
= wi −µ1iλ
= p∂Θ
∂Fi= w∗
i < wi if Mi = Mi (8)
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 8 / 22
Theoretical Framework
Theoretical Framework
In presence of labour constraint, budget constraint is non-linear;Replace it with a non linear one: at the optimum the slope of thebudget constraint is the marginal product of family farm labour whichis equal to the shadow wage.
The household maximisation problem under the linear budgetconstraint becomes:
max U(C , li ;Z) s.t. C + w∗i li = V ∗ (9)
where V ∗ = maxH,Fi
{pΘ(Fi ,H,S;A)} − whH − w∗i Fi + V + w∗
i T (10)
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 9 / 22
Theoretical Framework
Theoretical Framework
The solution to this problem yields Marshallian demand functions forleisure and hence the corresponding labour supply functions for eachmember of the household i is:
Ti − li = hi = Fi + Mi = hi (w∗i ,w
∗j ,V
∗;Z) (11)
Exploit duality theory and equate Hicksian and Marshallian laboursupply equations.
Differentiate with respect to shadow wages and obtain Slutskyequations:
∂hi (w∗i ,V
∗)
∂w∗j
=∂hi (w
∗i , u)
∂w∗j
+ hj∂hi (w
∗i ,V
∗)
∂V ∗ (12)
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 10 / 22
Empirical Strategy
Empirical Strategy I : the production function
Estimate an agricultural production function at household level andobtain marginal product of labour inputs on the farm.
Sample of households that own and operate some land and in whichat least one adult family member works on the farm.
Estimate the following general functional form:
Y = f (Fa,Fc ,Hh,Hx ,S,A;β; ε) (13)
Calculate marginal products of family adult and child labour. Theshadow wages are then used to estimate shadow income.
Assume heterogeneous labour inputs but some variable inputs canassume zero value (e.g. child labour) as not all inputs are used on alloutputs.
Endogeneity of variable inputs: IV approach.
Selection bias in sample used.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 11 / 22
Empirical Strategy
Empirical Strategy II: the labour supply
Estimate child labour supply of the following general functional form:
hi = g(w∗c , w
∗a , V
∗,Z ,Xi ) (14)
Compute income and substitution effects.
Endogeneity of shadow wages and shadow income (given thenon-separable nature): IV approach.
Hours of work of children censored at zero: Tobit and Heckmanspecifications.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 12 / 22
Empirical Analysis
Empirical Analysis: the production functionData Description
Data: Nepal Living Standard Measurement Survey 2003/04 (NLSSII).
Sample: 2404 households (61% of surveyed hh).
Among these the 45% have children 5-14 years old working in someactivities.
Over one-third of farm households in the sample use their children onthe farm.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 13 / 22
Empirical Analysis
Empirical Analysis: the production functionData Description
Description of production function variables Mean Standard deviation
Proportion of input
use
Value of crop and livestock production 36123.2 44943.6
Hectares of land owned or cultivated for someone else 0.9 1.1
Hours worked on farm by family adult (15+) 3437.7 2439.0
Hours worked on farm by family children (5-14) 324.9 686.5 38%
Hours worked on farm by hired labour (man-days * 8 hours) 131.9 422.5 40%
Hours worked on farm by exchange labour (man-days * 8 hours) 132.4 220.5 64%
Expenditures on seeds 264.6 1186.3 41%
Expenditures on fertilisers 1342.8 2718.5 67%
Value of farm equipment 4157.5 28564.5 98%
Other expenditures (includes livestock expenditures) 1769.0 5121.3 81%
Share of land irrigated 0.445 0.403
Share land sharecrop out (dry) 0.034 0.150
Share land sharecrop out (wet) 0.039 0.160
Share land fallow (dry) 0.148 0.280
Share land fallow (wet) 0.019 0.095
Share land sharecropped in 0.175 0.315
Rural West Mountains/Hills 0.290 0.454
Rural East Mountains/Hills 0.307 0.461
Rural West Tarai 0.150 0.357
Rural East Tarai 0.253 0.435
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 14 / 22
Empirical Analysis
Empirical Analysis: the production functionEstimates
(1) (2) (3) Cobb-Douglas(I) Cobb-Douglas (II) Translog (II) L Land hectares 0.4043*** 0.3649*** 0.5635*** (0.0187) (0.0186) (0.1432) L Adult labour 0.2752*** 0.2604*** -0.0904 (0.0208) (0.0200) (0.1723) L Child labour 0.0102** 0.0458** 0.0110** (0.0037) (0.0157) (0.0035) L Hired labour 0.0466*** 0.1031*** 0.1569* (0.0056) (0.0178) (0.0652) L Exchange labour 0.0152** 0.0246 0.0897 (0.0055) (0.0183) (0.0670) Observations 2404 2404 2404 r2 0.6991 0.7186 0.7351
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 15 / 22
Empirical Analysis
Empirical Analysis: the production functionEstimates - Shadow wages
Marginal products Estimates
Cobb-Douglas (I) Cobb-Douglas (II) Translog (II)
N Mean sd Mean sd Mean sd
Adult 2404 3.19 3.35 3.09 3.66 3.41 7.49
Children 921 1.44 3.28 6.24 13.68 1.57 3.67
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 16 / 22
Empirical Analysis
Empirical Analysis: the production functionInstruments
Adult and child farm labour : number of household members 5-10,11-15, 16-17, 18-59 in the household;
Hired and exchange labour : village level variables ⇒ dummy forvillage temporary migration; dummy for households that hire labour inthe village; number of landless households in the village that providelabour on other farms; daily market wage at village level for adultsand children;
Seeds and fertilisers expenditures: market prices of seeds andfertilisers at village level; input sold on the market dummy; distanceto closest market for agricultural input purchases.
Instruments are weak and often violation of exlusion restrictions.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 17 / 22
Empirical Analysis
Empirical Analysis: the labour supplyData Description
Sample: Children 5-14 years old living in sample of farm households→ 1494 children.
Among these the 50% have worked in the past 12 months in someactivity.
Among these the 74% work on their family farm, therefore hours ofwork censored at zero for children that do not work.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 18 / 22
Empirical Analysis
Empirical Analysis: the labour supplyData Description
Variable description mean sd
Total hours worked by children 5-14 in past 12 months 792.3 776.5
Est shadow wage children (5-14) 1.185 2.805
Est shadow wage adults(15-99) 2.944 2.122
Est shadow income 48674.6 63144.9
Sex child - Male=1 0.484 0.500
Age child 10.975 2.290
Rural East Mountains/Hills 0.379 0.485
Rural West Tarai 0.137 0.343
Rural East Tarai 0.221 0.415
Upper caste/ethn 0.454 0.498
Lower caste/ethn 0.509 0.500
head has primary education 0.203 0.403
head has secondary education 0.134 0.341
head age 43.95 11.11
head has chronic illness 0.108 0.310
head migrated 0.361 0.480
# hh members age 0-4 0.732 0.867
# hh members age 60+ 0.321 0.589
# adult working off-farm 5.159 2.449
subsistence household (crop and livestock sales=0) 0.462 0.499
number of observations 1494
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 19 / 22
Empirical Analysis
Empirical Analysis: the labour supplyEstimates
Dep var: (1) (2) (3) Annual hours worked From CB(I) From CB(II) From TL(II) Child shadow wage -0.6007*** -0.6122*** -0.6064*** (0.0208) (0.0209) (0.0206) Adult shadow wage 0.1008* 0.1271** 0.1005* (0.0426) (0.0417) (0.0420) Hh shadow income 0.1470*** 0.1575*** 0.1595*** (0.0258) (0.0251) (0.0265) Observations 1494 1497 1497 r2 0.5086 0.5049 0.5089
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 20 / 22
Empirical Analysis
Empirical Analysis: the labour supplyInstruments
Child shadow wage: children market wage at village level (inputingmissing wages); number of schools in the village;
Adult shadow wage: adult market wage at village level; dummy forwhether household uses hired or exchange labour on the farm;
Household shadow income: dummy for electricity and water in thevillage; dummy for household with a loan; market price of rice atvillage level.
Marinella Leone () Shadow Wages and Child Labour Supply in Agricultural Households in Nepal12 November 2010 21 / 22
Conclusion
Conclusion
Signs on wage and income elasticities not consistent with the theory.Income and substitution effects have opposite signs from whatexpected. New finding or weakness in estimation procedure?
Given the complexities behind a household’s decision making processand the underlying driving forces, reconsider the appropriateness ofthe empirical methodology.
Is there a more robust way to establish the monetary value of childlabour in farm households?
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