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a blog from young economists at Nova SBE

The Savings of Child Workers

Bangladesh currently has around 55 million children and about 7 million of those have a need to work. Most of these children face a problem of how to safeguard their income. Bangladeshi laws do not allow for children under 18 to create a bank account. As such, many face difficulties in keeping their earnings safe from robbers, overspending and parents.

This issue brought a need into this sub-sector of the economy, the creation of a mechanism of protecting their early income. NGOs rallied to this call and started creating small savings banks accepting deposits from children. This way children were able to improve their saving capabilities and the success that these NGOs are having reveal the underlying need.

Imaging that the present time and the future are two markets where children consume goods and leisure. Work is remunerated and as such enables more consumption and savings in the present. In this model it is possible to save capital from one period to another but it is subject to a very high depreciation rate, i.e. saved money is eroded by inflation, robberies, among other things. This savings banks introduces a reduction in this depreciation rate greatly increasing the incentive to save. However this will also incentivize increasing labor in order to save more leading to more child labor. As such future income will be increased due to savings and with this these children can lead better lives in the future and possibly avoid future child workers.

This solution is less than optimal. The real interest rate on these deposits is still negative as inflation destroys the purchasing power of deposits. Next steps on this endeavor must be the introduction of interest in deposits. This way young savers can fully enjoy the compounding of interest and as such obtain a much better chance at financing future consumption or higher end investments, thus improving class mobility.

Child labor in of itself is a difficult subject matter to discuss but this case brings the question of whether or not institutions should accommodate for it in case of its prevalence. There is a difficult balance to strike between incentivizing labor at a young age and promoting the accumulation of human capital by society.

As is discussed by Baland and Robinson, among other papers, child labor is inefficient if the income received is less than the future earnings obtained from education. This paper does not exactly replicate conditions of the situation in Bangladesh but it does give a good approximation whilst considering the possibility of no savings mechanism in which child labor will most likely occur and be inefficient as it represents a less efficient borrowing mechanism that trades income today for less income tomorrow. The situation even appears to be Pareto inefficient but that could be attributed to other factors such as not including the wage reduction for high-skilled workers in a second period. What this means for this particular case is that by introducing a financial system, even if limited in scope, income in the future can be higher either through savings or through higher accumulation of human capital if the children end up studying more.

– Manuel Costa Reis, 614

Bibliography
Judah, Sam. “Making Time: Helping child workers save their earnings”. BBC World.
27th of September 2013. http://www.bbc.co.uk/news/magazine-24281511
Baland, Jean-Marie & James A. Robinson. “Is Child Labor Inefficient?” Journal of Political Economy, Vol. 108, No. 4, August 2000. University of Chicago Press
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Author: studentnovasbe

Master student in Nova Sbe

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