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Wage Traps as a Cause of Illiteracy, Child Labor, and Extreme Poverty

  • Dennis L. Gärtner

    ()

  • Manfred Gärtner

    ()

When labor incomes approach subsistence levels, the labor supply curve slopes outward, because the fight for survival mandates households to look for longer work hours in response to falling wage rates. We explore conditions under which near-subsistence scenarios may imply wage traps, labor market failures that can be the cause of undernourishment, illiteracy, and child labor. After stating general conditions under which wage traps occur, we look at specific production functions typically employed in quantitative analyses of growth and development. We find that standard Cobb-Douglas production functions do not permit wage traps, whereas CES functions do. Beyond that it turns out that when subsistence requirements increase with work hours, and when work effort rises with the wage rate, up to the efficiency-wage threshold, wage traps become more likely. Measures such as bans on child labor, implementation of minimum wage laws, or the establishment of labor unions may quite effectively improve conditions in wage-trapped labor markets.

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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2008 with number 2008-02.

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Length: 23 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:usg:dp2008:2008-02
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  1. Basu, Kaushik & Van, Pham Hoang, 1998. "The Economics of Child Labor," American Economic Review, American Economic Association, vol. 88(3), pages 412-27, June.
  2. World Bank, 2007. "Global Monitoring Report 2007 : Millennium Development Goals, Confronting the Challenges of Gender Equality and Fragile States," World Bank Publications, The World Bank, number 6637.
  3. Costas Aariadis & John Stachurski, 2004. "Poverty Traps," Department of Economics - Working Papers Series 913, The University of Melbourne.
    • Azariadis, Costas & Stachurski, John, 2005. "Poverty Traps," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 5 Elsevier.
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  11. Blunch, Niels-Hugo & Verner, Dorte, 2000. "Revisiting the link between poverty and child labor - the Ghanaian experience," Policy Research Working Paper Series 2488, The World Bank.
  12. Maryke Dessing, 2008. "The S-shaped labor supply schedule: evidence from industrialized countries," Journal of Economic Studies, Emerald Group Publishing, vol. 35(6), pages 444-485, November.
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