How to tax covert child labor

Everybody agrees that child labor should be eradicated, even if some child labor maybe efficient. There is also wide agreement (except among politicians and officials) that simply banning child labor is not the solution, as parents are usually forced to send their kids to work due to poverty, borrowing constraints, or uncertain educational outcomes. In addition, it is difficult to ban something that is covert, as most child work is performed within the home or farm.

Alessandro Cigno proposes a scheme that would take care of all these issues together. While complex it addresses them one by one: To take care of the borrowing constraint, the government provides education grant. To make sure not only attend school but also spend sufficient time on homework, grants based on final results are given. And finally, to reduce the uncertainty about education outcomes, it redistributes from rich to poor. The result is not a first best for two reasons: first because of the distortions introduced, second because of the moral hazard with covert child labor. But it reduces in most cases child labor. Whether governments in developing countries are capable of implementing such a complex system remains to be seen. One can imagine improving on the PROGRESA system in Mexico, whether attendance at school is sufficient to obtain a subsidy, but assiduity at school is not rewarded.