The Impact of Fair Trade on Child Labor Working Hours in a Small Open Economy

ABSTRACT This study formally examines the effects of fair trade on child labor in a small open developing country. A fair‐trade firm employs only adult workers and provides them with a fair‐trade wage and pays a fair‐trade premium, which is used to develop local infrastructure, whereas a conventional firm may employ both children and adults and pay them discriminatory wages. Households are categorized into fair‐trade households, where only adults work, and non‐fair‐trade households, where both adults and children may get employed. The number of households in each group is endogenous. The analysis illustrates that, although an increase in the world price of a fair‐trade good raises the number of fair‐trade households and thus reduces the number of working children, it also increases the total working hours of children in the economy. Conversely, an increase in the fair‐trade wage has the opposite effect. Furthermore, the utility of any household depends on local infrastructure, which is constructed using the fair‐trade premium. The fair‐trade premium reduces the total number of children's working hours when the share of non‐fair‐trade households is relatively low. However, this requirement is relaxed when the child labor supply is inelastic.