Suppose that it is well known that many children work in low-skill jobs in poor country “X.” If rich country “Y” buys goods from poor country “X,” then the increase in demand for their products is large enough to raise the wages of all low-skill workers in country “X.” Because of this, a politician from country “Y” makes the following statement: “We should not buy any goods from country “X.” If we do, it will only increase the number of child laborers there.”
1. Analyze the politician’s statement using economic theory. In doing so, suppose that parents make the decisions about whether their children will work or do other things (e.g. go to school). (Hint: your answer should include something about income and substitution effects.)
2. Is there any evidence from the real world that suggests that as wages continue to rise, child labor eventually declines?