The shadow wage of child labor: An application to Nepal

This paper describes a new method for estimating shadow wages and identifying the shadow contribution of child labor to household income. The approach enables a direct test for recursivity by comparing the estimated shadow wages with the market wage. This is a novel option to test for non‐separability that complements traditional indirect tests based on constraining production or consumption decisions. Our innovative identification strategy is not specific to child labor but can also be used to identify gender‐specific shadow wages for women and men. The estimated shadow wages are meaningful in the context of Nepal's rural economy. Based on the results of our direct test for separability, we conclude that the separable representation of farm households is inconsistent with the Nepalese data. We also estimate the contribution of child labor to household income at both the household and national levels. A series of simulations illustrates the role that child labor plays in household livelihoods and how it affects Nepal's income distribution.