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

23 Pages Posted: 24 Jan 2008

See all articles by Dennis L. Gärtner

Dennis L. Gärtner

University of St. Gallen

Manfred Gartner

University of St. Gallen - SEPS: Economics and Political Sciences

Date Written: January 2008

Abstract

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.

Keywords: Subsistence income, labor supply, poverty, child labor, wage trap, market failure, development, growth

JEL Classification: J2, J4, O11

Suggested Citation

Gärtner, Dennis L. and Gartner, Manfred, Wage Traps as a Cause of Illiteracy, Child Labor, and Extreme Poverty (January 2008). U. of St. Gallen Law & Economics Working Paper No. 2008-02, Available at SSRN: https://ssrn.com/abstract=1086353 or http://dx.doi.org/10.2139/ssrn.1086353

Dennis L. Gärtner (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 6
St Gallen, 9000
Switzerland

Manfred Gartner

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Rosenbergstrasse 51
St. Gallen, St. Gallen CH-9000
Switzerland

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