Labor in Search Equilibrium

Transcription

1 Monitoring, Sanctions and the Demand for Child Labor in Search Equilibrium Carolina Brasil Márcio Corrêa Zilânia Mariano May, 2013 Abstract Child labor is perhaps one of the worst economic and social problem that affects young generations around the world. Over the years, different theories have been proposed to understand the causes and consequences of such a persistent phenomenon. The objective of this paper is to propose a new hypothesis behind the incidence of child labor. We built a matching model with two sectors where the hire decision of firms can be perfect monitored by the government. We then compare the equilibrium effects of a policy that intends to ban the incidence of child labor. We show that this policy comes with an increase in adults employment rate, an increase in the relative size of the technological sector and an increase in the number of adults involved in the manual sector. JEL Classification: J08; J23; J64 Keywords: Job Matching; Labor Demand; Child Labor PhD Student at CAEN - Graduate Program in Economics, Universidade Federal do Ceará, Av. da Universidade, 2700, , Fortaleza, Ceará, Brasil. CAEN - Graduate Program in Economics, Universidade Federal do Ceará, Av. da Universidade, 2700, , Fortaleza, Ceará, Brasil. PhD Student at CAEN - Graduate Program in Economics, Universidade Federal do Ceará, Av. da Universidade, 2700, , Fortaleza, Ceará, Brasil. Márcio Corrêa thanks financial support from CNPq. 1

2 1 Introduction Child labor is one of the worst social problem affecting developed and developing economies around the world. According to ILO (2010) there were around 322 million of children involved in some sort of working activities in 2004 and there were around 306 million of young workers participating actively in the labor market in the year of Although these figures demonstrate that we are moving in a direction to reduce the number of children involved in some sort of working activities, these numbers stubbornly persist in high levels, surpassing the population of countries like Brazil or even equalizing the population of the United States. These data together with the expected negative socioeconomic implications that child labor brings to young workers have attracted the attention of researchers and policy makers around the world intending to understand the origins, the consequences and the effective ways to reduce the incidence of child labor. Different arguments have already been proposed in literature to explain these previous phenomenon. Basu and Van (1998), for example, proposed that youth participation in the labor force is the result of the families need to survive. The authors defended that the more difficult it is to make ends meet, the higher will be the incidence of child labor inside a particular family. Other closer argument to the problem of child labor has been proposed by Ranjan (2001). The author showed, in an overlapping generations model, that there exists a positive correlation between income distribution and the problem of child labor. In this way, child labor may be the result of a credit constraints phenomenon. 1 For aditional details see the Global Child Labour Developments: Measuring Trends from 2004 to 2008, from the International Labour Organization. 2

3 A different argument was proposed by Baland and Robinson (2000). The authors built a model with a trade-off between labor force participation and human capital accumulation by children. They defended that child labor is the result of the difficulty that parents have to fully internalize the negative effect of child labor. They also showed that a legal ban of child labor could represent a Pareto improving policy 2. Dessy and Pallage (2001) proposed, in turn, that child labor could be the result of a coordination failure between schooling decisions, made by parents, and investments in technological improvements, made by firms. The authors argued that since investments in skill-biased technologies in an economy with low levels of human capital are a risky venture, it is more feasible to find firms investing in unskilled technologies and parents sending their children to work. Many child labor policies have already been proposed in literature. Labels, boycotts, trade sanctions, legislative measures and conditional cash transfers, to name some examples, have been approached as mechanisms to reduce the incidence of child labor 3. However, most of the conclusions point out to a limited positive or even to a negative effect of these policies on the incidence child labor. Another interesting aspect that emerges from the literature on the economics of child labor is that the vast majority of studies focus exclusively on the push effect. In other words, most studies have the objective to study the reasons why parents decide to send their children to work 4. However, it should be pointed out that this previous focus on the labor supply decisions only tells part of the story. It is also important to understand, for example, why firms demand child labor and what are the effects of 2 See Basu (1999) for a survey on the causes and consequences of child labor. 3 See Baland and Duprez (2009), Basu and Zarghamee (2009) and Basu (2005) on an evaluation of the effectiveness of these policies. 4 In our opinion, the only few exceptions to this trend are Basu, Chau, and Grote (2006) and Edmonds (2008). 3

4 expanding children labor force participation on the adult labor market equilibrium. The main goal of the present paper is to study the pull effect. That is, we are interested in build a frictional labor market model based on Pissarides (2000) where firms can hire child and adult unemployed workers. We then investigate the general equilibrium effect of a policy that aims to ban the incidence of child labor. In particular, we study the scenario where firms are monitored by government and punished once they are found employing young workers. In this way, we try to address the following questions: Does the policy that intends to monitor and punish firms that demand child labor increase adult employment? What are the other benefits attained by such a policy? Does this policy comes with a reduction in the job creation dynamics? What are the effects over adult wage rate? We show, in spirit of Shapiro and Stiglitz (1984), Calvo (1985) and Boone, Fredriksson, Holmlund, and van Ours (2007), that a solution to this previous problem can be a policy of child labor monitoring and punishment. The idea is that the government can adopts an endogenous policy of monitoring and sanctions whose main objective is to ban the incidence of child labor. We show that although this policy has a positive effect on the volume of adult workers employed in both sectors, it implies a reduction in the volume of job created by one sector of the economy. Besides this introduction, this paper has two more sections. In the next one we present the main theoretical model and evaluate the labor market gains from a policy of perfect monitoring and another one that allows child labor to persist in equilibrium. We also compare the consequences of moving from a no-monitoring policy equilibrium to one with perfect monitoring. The last section contains the main concluding remarks. 4

5 2 Theoretical Model The economy is composed by a constant population of workers who live infinitely, a government and an endogenous number of firms, which once matched with a worker, give way to a production of a single consumption good. Time is continuous and there are two types of workers in the economy: adults and children. Let α represent the proportion of adults in the economy. Firms and workers are risk-neutral and discount the future at the exogenous and constant rate r. Consider that each firm has access to a production technology that exhibits constant returns to scale with labor as the only input. Each firm has only one job position, which can be empty or filled, while each worker can be unemployed or employed in only one job position per period. There are two sector in the economy: industrial and artisanal. Consider, as in Ranjan (2001), that the technological sector uses only adult workers whilst the artisanal sector produces the same final good with adult or young workers. Each firm can freely open a job vacancy in the handicraft sector. However, consider that if a firm decides to open a vacancy in the manufacturing sector, they have to spent k adapting the job vacancy to implement the advanced technology. Let this cost be stochastic and determined by the general distribution H(k) with support in the unit interval. Likewise, consider that adult choice between being unemployed in both sectors is also endogenous, where c is the cost of learning to operate the production technology in the industrial segment of the economy. Let this cost be also stochastic and defined by the general distribution G(c) with support in the unit interval. It can be shown from these previous assumptions that if we define U ia and U ha to be the present discounted values of an adult unemployed worker in the industrial and 5

6 the artisanal sector, respectively, we have that whenever: U ia c U ha, (1) adults prefer to work in the industrial sector. Similarly, if we define V i and V h to be the present discounted values of a vacancy in the industrial and the handicraft sector, we that that whenever: firms prefer to open a vacancy in the industrial sector. V i k V h, (2) Notice from expressions (1) and (2) that we can determine the equilibrium values of k and c that leave firms and adult workers indifferent between open a vacancy and working in both sectors, respectively. Before production starts, firms and workers are involved in a search process to find a partner, where e h and e i represent firm searching costs in both sectors. The number of job matches formed per period in the manual production sector is given by a non-negative, concave and homogeneous of degree one matching function, m(v h, u h ), which is crescent in its arguments. Let v h represents the vacancy rate and u h denotes the fraction of unemployed workers - adult and child - in this sector. By the homogeneity assumption, the probability rate of filling a vacancy is given by p(θ h ) = m(v h,u h ) v h, where θ h = v h u h denotes the labor market tightness of the handicraft sector. In turn, unemployed workers move to the employed status at a rate q(θ h ) = m(v h,u h ) u h. Similarly, it can be shown that p(θ i ) and q(θ i ) represent, respectively, the rate at which a vacancy is filled and the rate that an adult unemployed worker moves to the employment state in the industrial sector. An adult employed worker in the handicraft sector produce y h,a units of the consumption good per period. Each child in this same sector produces y h,c per period, 6

7 whilst each adult in the industrial sector produces y i,a units of the consumption good per period. In turn, considers that an adult unemployed worker in the artisanal and the industrial sector receives, respectively, z h and z i units of the consumption good as unemployment insurance per period. Each child unemployed in the manual sector does not have the right to receive unemployment insurance 5. The government raises money from taxing all active firms in the economy and use this revenue to implement a monitoring policy and to pay unemployment insurance to adult unemployed workers. Consider that the government monitoring policy is designed to prevent the incidence of child labor 6. Let the wage rate of a child be endogenous and given by w h,c. In turn, consider that the wage rates of an adult worker are also endogenous and given by w h,a, if he works in the handicraft sector, and by w i,a, if he is employed in the industrial sector. Notice from the previous assumptions that each firm in the craftwork sector can freely decides to employ adults and children. If we impose the assumption that y h,c y h,a z h, firms will always prefers to hire young workers 7. However, these firms are also subject to a government child labor monitoring policy. If a particular firm is found employing a young worker, consider that the match is immediately destroyed, with a child worker returning to the unemployment state and the firm returning to the vacancy position. It can be shown that firms evaluate employing adult worker in the industrial 5 Consider throughout the model that child labor is an illegal activity. In this way, an unemployed child does not have the right to apply for the unemployment benefits. 6 As in Cavalcanti and Corrêa (2013) we assume that government expending are financed through lump-sum taxes. 7 This condition is derived later on from the expression that establishes the optimal monitoring rate, b. This inequality is a maintained assumption. 7

8 sector or young workers in the artisanal sector according to the monitoring rate. If b represents the reservation monitoring rate compatible with the elimination of child labor, we have that whenever b b, there will be no child labor in equilibrium. However, if the monitoring rate is given by b < b child labor persists in equilibrium 8. Suppose that J i,a, J h,c and J h,a represent filled position values for a firm in the industrial sector with an adult worker and with a child and an adult employed worker in the handicraft sector, respectively. In turn, let U h,c, W h,c, W h,a and W i,a represent unemployment and employment present discounted values for the child worker and the employment present discounted values for an adult employee in the manual and in the industrial sector, respectively. Accordingly, value functions are given by: rv h = e h + p(θ h )Max[J h,a V h ; J h,c V h ]; (3) rv i = e i + p(θ i )[J i,a V i ]; (4) rj h,a = y h,a w h,a λ[j h,a V h ]; (5) rj h,c = y h,c w h,c (λ + b)[j h,c V h ]; (6) rj i,a = y i,a w i,a λ[j i,a V i ]; (7) for firms, and ru h,a = z h + q(θ h )[W h,a U h,a ]; (8) ru h,c = q(θ h )[W h,c U h,c ]; (9) ru i,a = z i + q(θ i )[W i,a U i,a ]; (10) 8 In this section we present the main theoretical model. In section (2.1) we evaluate the labor market equilibrium without the monitoring policy, that is, when considering b = 0. Then, we solve for the monitoring equilibrium and evaluate the labor market effects of moving from the first to the second policy. 8

9 rw h,a = w h,a λ[w h,a U h,a ]; (11) rw h,c = w h,c (λ + b)[w h,c U h,c ]; (12) rw i,a = w i,a λ[w i,a U i,a ]; (13) for workers. Equation (3) tells us that a firm with a vacant position in the artisanal sector expends e h, as search cost, per period. With probability p(θ h ) this vacant position is filled. Notice that this job vacancy can be occupied by a child unemployed worker or by an adult unemployed worker, respectively. The following expression has similar interpretation. The main difference between these expressions is that firms in the industrial sector only employs adult workers, spending e i per period to find those workers. Expression (5) tells us that a filled position with an adult worker in the handicraft sector produces y h,a and pays w h,a per period. This filled position is destroyed due to an exogenous idiosyncratic shock that occurs at rate λ. In this case, firms return to the vacancy position looking for another adult unemployed worker. The next two equations are similar to (5). The only significative difference between (6) and (7) is that a filled position with a child worker can also be destroyed at rate b, the government monitoring rate. Equations (8) - (10) are also standard in the literature. They tell us that only adult unemployed workers receive unemployment benefits. At instantaneous rate q(θ h ) an unemployed worker find a vacant job in the handicraft sector, moving to the employment status. An adult unemployed worker in the industrial sector moves to the employed state at rate q(θ i ). The final expressions are also similar. Let s focus only on the last one. This equation tell us that an adult worker employed in the industrial sector receives w i,a 9

10 units of the consumption good as wages per period. This job position can be destroyed due to an idiosyncratic shock that arrives at rate λ. In this case, the unemployed worker returns to the search position. 2.1 No Monitoring Equilibrium, b = 0 As previously mentioned, consider that y h,c y h,a z 9 h and that firms are not monitored by the government, that is b = Then the equilibrium will be characterized by the handicraft firms demanding only child labor and firms in the industrial sector demanding adult workers. Wage Rates. If a particular match is destroyed both the worker and the firm have to pay the costs related to the return to the search process. In this way, each match generates a surplus that has to be distributed among the two parties. Consider, as standard in job search theory, that this division is determined by the Generalized Nash Bargain Solution between firm and worker, where β represents workers bargaining power. Then, the wage rates must satisfy: β[j h,c V h ] = (1 β)[w h,c U h,c ]; (14) β[j i,a V i ] = (1 β)[w i,a U i,a ]. (15) Using expressions (3), (4), (6), (7), (9), (10), (12), (13), (14), (15) and the usual hypothesis of free entrance of firms guarantee that the wage rates of a young and an 9 Notice that assuming that this inequality is verified is the same of considering that firms in the handcraft sector always prefers to be contacted by the unemployed children. If instead we considers that y h,c < y h,a z h we will never have child labor in equilibrium since firms voluntarily prefers to hire adult workers. 10 Although the main result in this section can be generalized to the case where b < b we consider the scenario where b = 0 to simplify the model presentation. 10

11 adult worker are given by: w h,c = β(y h,c + θ h e h ), (16) w i,a = β(y i,a + θ i e i ) + (1 β)z i. (17) Notice that these two previous expressions give us the wage rates of a young and an adult worker employed in the artisanal and the industrial sector, respectively. They are standard in literature. Equation (17), for instance, is composed by three terms. The first one is related to adults job match productivity, whilst the second and the third terms are related to an adult worker outside option. Notice that workers are rewarded for the saving of hiring costs of the representative firm, βθ i e i. They also receive a proportion (1 β) of their pay while unemployed, z i. Job Creation. From equations (4) - (5) and (7) - (8) we have that the dynamics of job creation is given by: y h,c w h,c (r + λ)e h p(θ h ) = 0, (18) y i,a w i,a (r + λ)e i p(θ i ) = 0. (19) The first term of the last two expressions describe the firm benefit of filling a vacant position in both sectors. The other two terms refer to the wage rate and to the expected cost of fill each vacancy. It can be noticed from (18) that higher levels of r, λ, w h,c and e h mean a lower job creation dynamics in this sector, θ h. Reservation Costs. From equation (1) we have that whenever: U ia c U ha, 11

12 adult workers prefer to work in the industrial sector. Now, since y h,c y h,a z h is considered in equilibrium, we have that firms in the handicraft sector never hires adult workers. In this way, whenever c U ia, workers search for a job in the the industrial sector. Similarly, it can be shown that whenever k V i V h, firms prefer to open a vacancy in the industrial sector. Using equations (3), (4) and (8) we have that: c = z i r + ( β 1 β )θ ie i r, (20) k = p(θ i)[(1 β)(y ia z i ) βθ i e i ] (r + λ)e i (r + p(θ i ))(r + λ) (21) p(θ h)[(1 β)y hc βθ h e h ] (r + λ)e h, (r + p(θ h ))(r + λ) determine the equilibrium values of c and k. Notice from these expressions that G(c) gives us the mass of the adult labor force engaged in the industrial sector. In turn, 1 G(c) represents the mass of the adult workforce that never participate in the labor force. It can also be verified from (21) that H(k) firms operates in the industrial sector. The remaining firms, 1 H(k), have high industrial costs and operates exclusively in the artisanal sector. Unemployment Rate and Equilibrium. The equations that describe unemployment rate in the industrial and artisanal sector, in the steady state, are given by: λ[α (1 G(c)) u i ] = q(θ i )H(k)u i, (22) λ(1 α u h ) = q(θ h )(1 H(k))u h. (23) 12

13 Observe that the first equation also describes adult unemployment, since these workers can only be employed in the industrial sector. Also notice that the α (1 G(c)) represents the size of the adult workforce engaged in the industrial sector. In this way, the left side of (22) equals the number of employed workers in the industrial sector that moves to unemployment due to the idiosyncratic shock. The right side refers to the number of adult workers that moves in the opposite direction, from unemployment to employment. Also notice that at rate q(θ i )H(k) adult workers find a job in the industrial sector. Expression (23) has a similar interpretation. The term on the left side represents the rate at which employed children migrate to unemployment, while in the right hand side we have the rate in which working children move from unemployment to employment. From these expressions we have that: u i = λ[α (1 G(c))], (24) λ + q(θ i )H(k) u h = λ(1 α) λ + q(θ h )(1 H(k)), (25) represent unemployment in the industrial and the handicraft sector, respectively. Notice that if c grows, the higher will be the adult unemployment rate. In turn, increases in k and θ i generate a reduction in the unemployment rate in the industrial sector of the economy. Definition: Consider that b = 0 and y h,c y h,a z h. A steady-state equilibrium for this economy is a eight-tuple (w h,c, w i,a, θ h, θ i, c, k, u i, u h ) such that (16) - (21), (24) and (25) are satisfied. Notice that the equilibrium has a block recursive structure. Equations (16), (18), (17) and (19) determine separately the equilibrium values of w h,c and θ h and w i,a and 13

14 θ i. Then we can use θ h and θ i in (20) and (21) to obtain the equilibrium values of c and k. Finally, using c, k, θ h and θ i in (24) and (25) we determine u i and u h in equilibrium. 2.2 Monitoring Equilibrium, b = b Now, consider that government adopts a monitoring policy intending to completely eliminate the incidence of child labor. Wage Rates. As before, consider that the wage rate satisfies the Generalized Nash Bargain Solution between firm and worker, where β represents workers bargaining power. Then, using equations (3) - (5), (7), (8), (10), (11) and (13) - (15) we have that: w h,a = β(y h,a + θ h e h ) + (1 β)z h, (26) w i,a = β(y i,a + θ i e i ) + (1 β)z i. (27) Notice that the wage rate of and adult employed in the industrial sector did not change. Regarding the wage rate in the manual sector, it can be seen that if y h,c > y h,a + ( β 1 β )z h then there is a reduction in the wage rate paid in the handicraft sector. However, since y h,c y h,a z h we have that productivity in the artisanal sector also falls with the monitoring policy. Monitoring Rate. The government determines a monitoring rate in order to eliminate child labor. Then, from equations (3), (5) and (6) we have that whenever: y h,a w h,a r + λ y h,c w h,c r + λ + b 14

15 firms in the handicraft sector never hire children. Using (26) and (27) we have that the equilibrium monitoring rate is given by b = (r + λ)(1 β)[y h,c y h,a + z h ] (1 β)(y h,a βθ h e h ) (1 β)z h. (28) Notice that since b belong to the unit interval, it will only be greater or equal to zero if y h,c y h,a z h, that is if the child labor productivity are at least equal to the adult productivity in the craftwork sector, deduced from the unemployment insurance. It can be seen that the higher is the productivity gap y h,c y h,a the bigger must be the monitoring rate in order to avoid the employment of children. Likewise, increases in θ h must also be compensate by a higher level of b. Job Creation. From equations (3) - (5) and (7) we have that job creation is now defined by: y h,a w h,a (r + λ)e h p(θ h ) y i,a w i,a (r + λ)e i p(θ i ) = 0, (29) = 0. (30) It can be shown that θ i is determined by the same expression found in the previous section. However, it can be seen that there is a reduction in θ h coming from the lower productivity of the adult labor force. Reservation Costs. Consider that government implements the no child labor policy by choosing the optimal level of monitoring defined by (28). Then, the workers and firms reservation costs will be given, respectively, by: c = ( z i z h r β ) + ( 1 β )(θ ie i θ h e h ), (31) r k = p(θ i)[(1 β)(y ia z i ) βθ i e i ] (r + λ)e i (r + p(θ i ))(r + λ) (32) p(θ h)[(1 β)(y ha z h ) βθ h e h ] (r + λ)e h, (r + p(θ h ))(r + λ) 15

16 Notice from these expressions that c and k give us the reservation values for workers and firms between industrial and artisanal sectors. In this way, G(c) represents the mass of the adult labor force engaged in the industrial sector and 1 G(c) the size involved in the handicraft sector. As before, we also have H(k) firms operating in the industrial sector. The remaining firms have high industrial costs and always act in the handcraft sector. Notice that the higher is z h and e h the lower will be the equilibrium value of c. Increases in z h, in turn, reduces the equilibrium value of k. This happens because the higher is z h, the bigger will be the wage rate in the manual sector. This result induces firms to open their vacancies in the industrial sector, reducing the cutoff value of k. Unemployment Rate and Equilibrium. The equations that describe unemployment rate in the industrial and manual sector, in the steady state, are now given by: u i = λ[α (1 G(c))], (33) λ + q(θ i )H(k) u h = λ[α G(c)] λ + q(θ h )(1 H(k)), (34) The first equation describes adult unemployment in the industrial sector. This is again the same equation found in the previous section. However, the unemployment in the manual sector is now determined by (34). Notice that the higher is G(c) the bigger will be the unemployment rate in the industrial sector and the lower will be the manual sector unemployment rate. Increases in H(k) also generates a higher unemployment rate in the artisanal sector. Definition: Consider that y h,c y h,a z h. A steady-state equilibrium for this economy is a nine-tuple (w h,a, w i,a, b, θ h, θ i, c, k, u i, u h ) such that (26) - (34) are satisfied. 16

17 The equilibrium has again a block recursive structure. Equations (26), (29), (27) and (30) determine the equilibrium values of w h,a and θ h and w i,a and θ i. Given the equilibrium value of θ h, equation (28) determines b. We can also use θ h and θ i in (31) and (32) to obtain the equilibrium values of c and k. Finally, using c, θ h and θ i in (33) and (34) we obtain u i and u h in equilibrium. Proposition 1 Let β = (1 β) and consider a steady state equilibrium without monitoring. The implementation of a monitoring policy defined by: leads to: b = (r + λ)(1 β)[y h,c y h,a + z h ] (1 β)(y h,a βθ h e h ) (1 β)z h i. A reduction in θ h and no changes in θ i ; ii. An increase in k and a reduction in c. Proof: Consider expression (18) - (19) and (29) - (30). Replacing the wage rates (16) - (17) and (26) - (27) we have that the job creation dynamics in both sectors are given by: (1 β)y h,c [r + λ + βq(θ h)]e h p(θ h ) = 0 (1 β)(y i,a z i ) [r + λ + βq(θ i)]e i p(θ i ) = 0 without the monitoring policy and by: (1 β)(y h,a z h ) [r + λ + βq(θ h)]e h p(θ h ) (1 β)(y i,a z i ) [r + λ + βq(θ i)]e i p(θ i ) = 0 = 0 17

18 with policy, respectively. From these expression it can be easily seen that there is no change in θ i and there is a reduction in θ h with the monitoring policy implementation. Likewise, it can be also be shown that the monitoring policy implies an increase in k and a reduction in c, since y h,c y h,a z h. The previous proposition show us that although the monitoring policy does not implies any change in the job creation dynamics in the industrial sector, if comes with negative effect over θ h. This happens basically because the public policy forces firms in the artisanal sector to hire workers with low levels of productivity. It can also be noted that the set of firms operating in the industrial sector increases with the monitoring policy, due to the increase in k. Then, we have a triple negative effect acting over the artisanal sector. First, the size of firms participating in this sector of the economy reduces with the child labor suppression policy. Secondly, the job creation dynamics flows in the manual sector also reduces since opening a vacancy in this sector is not too more profitable as before. Third and finally, the job monitoring policy also implies a reduction in c, leading to an increase in the size of the adult labor force that decides to work in the handicraft sector. The following proposition shows that the overall effect of the monitoring and sanction policy is an increase in the adult unemployment rate. Proposition 2 The monitoring policy leads to a reduction in the unemployment rate in the industrial sector. Proposition 1 establishes that implementing a monitoring policy b = b generates a reduction in c and an increase in k. Then, it can be easily proved by applying the implicit function theorem in (33) that the adult unemployment rate in the industrial sector decreases both by the low level of c and by the higher level of k. 18

19 It can also be noticed that that the impact of the policy over the adult workers in the artisanal sector is positive. However, this result may be misleading. Remember from section 2.1 that without the monitoring policy, the group 1 G(c) of adults was out of the labor force and not unemployed, since no firms in the handicraft sector would like to hire them. With the monitoring policy this group of workers enters in the labor force, searching for a job vacancy in the artisanal sector. In this way, although there is an increase in the adults unemployment rate, this policy also comes with an increase in the volume of jobs to adult workers and a complete reduction in the incidence of child labor. 3 Concluding Remarks This papers shows the effects of monitoring and sanctions policy on the labor market in a model characterized by search frictions and endogenous labor market participation. In our model, the government has the choice to monitors active firms, at rate b =, intending to punish firms that illegally employ youth workers. We then compare the equilibrium effect of moving from an equilibrium characterized by no monitoring to another one characterized by a level of monitoring that perfectly eliminates child labor. It is shown that the monitoring policy has a negative effect on the adult unemployment rate in the technological sector. However, the number of adult workers involved in the manual sector increases, pushing up the unemployment rate in this sector. It is also verified that the increase in the unemployment rate of the adult workforce involved in the handicraft sector is due to an increase in the labor force participation of this segment of the economy. 19

20 The policy also comes with a reduction in job creation dynamics in the artisanal sector, with an increase in the relative size of the industrial sector and with a complete reduction in child labor. References Baland, J. M., and C. Duprez (2009): Are Labels Effective Against Child Labor?, Journal of Public Economics, 93(11). Baland, J. M., and J. A. Robinson (2000): Is Child Labor Inefficient, Journal of Political Economy, 108(4), Basu, A., N. Chau, and U. Grote (2006): Guaranteed Manufactured Without Child Labor: The Economics of Consumer Boycotts, Social Labelling and Trade Sanctions, Review of Development Economics, 10(3), Basu, K. (1999): Child Labor: Cause, Consequence, and Cure, with Remarks on International Labor Standards, Journal of Economic Literature, 37(3), (2005): Child Labor and Law: Notes on Possible Patologies, Economics Letters, 87(2), Basu, K., and P. H. Van (1998): The Economics of Child Labor, American Economic Review, 88(3), Basu, K., and H. Zarghamee (2009): Is Product Boycott a Good Idea for Controlling Child Labor? A theoretical Investigation, Journal of Development Economics, 88(2),

21 Boone, J., P. Fredriksson, B. Holmlund, and J. van Ours (2007): Optimal Unemployment Insurance with Monitoring and Sanctions, The Economic Journal, 117(3), Calvo, G. (1985): The Inefficiency of Unemployment: The Supervision Perspective, Quarterly Journal of Economics, 100(2), Cavalcanti, T., and M. Corrêa (2013): Cash Transfers to the Poor and the Labor Market: An Equilibrium Analysis, Review of Development Economics, Forthcoming. Dessy, S., and S. Pallage (2001): Child Labor and Coordination Failures, Journal of Development Economics, 65(2), Edmonds, E. (2008): Child Labor, in Handbook of Development Economics. Volume 4. Pissarides, C. (2000): Equilibrium Unemployment Theory. Oxford: Basil Blackwell. Ranjan, P. (2001): Credit Constraints and the Phenomenon of Child Labor, Journal of Development Economics, 64(1), Shapiro, C., and J. Stiglitz (1984): Equilibrium Unemployment as a Worker Discipline Device, The American Economic Review, 74(3),