This article analyzes a minimum wage in a market with imperfect information and job search. It establishes that employment effects of a minimum wage do not generally indicate welfare effects. It shows that researchers interested in welfare consequences should ask two questions. First, is the existing minimum wage binding? Second, do some firms that would be bound by a new minimum wage presently experience labor shortages? If the answers to these questions are no and yes, respectively, this article supports the conclusion that a higher minimum wage is welfare improving, regardless of its effect on the unemployment rate.

In a recent paper, Kaushik Basu and Pham Hoang Van (BV, 1998) develop an important and very interesting model in which a fairly productive economy exhibits multiple equilibria, with children working in at least one. They identify two assumptions as essential to this result. The first - - which they call the "luxury axiom" - - is that a family sends its children to the labor market only if its income from sources other than child labor is very low. The second is embodied in their "substitution axiom" which states that from the point of view of firms, child labor is substitutable for adult labor. In this comment, we show that in addition to these two assumptions about the micro-level behavior of households and firms, there is also an essential macro-level assumption that may be termed the "distribution axiom:" income or wealth from non-labor sources must be sufficiently concentrated in the hands of a few agents. We establish that if non-labor income is distributed with sufficient equality, a market equilibrium with child labor cannot exist in the BV model. Beyond their contribution as an extension of BV's theory, our results formalize a proposition implicit in recent policy discussions of child labor. Christiaan Grootaert and Ravi Kanbur (1995) note that as household-level poverty is well-known to be the major cause of child labor, "[g]eneral economic development, equitably distributed, is the best and most sustainable way of reducing child labor." (p. 198, emphasis added) Policy documents from the International Labor Organization (ILO) have long conveyed this view, and now the World Bank appears to as well (Peter Fallon and Zafiris Tzannatos, 1998). There is a growing recognition that while economic development and development policies are necessary to eliminating child labor, they are not always sufficient on their own. Distributional considerations matter. Indeed, in the case in which BV's model yields multiple equilibria, the economy is developed enough to eliminate child labor. In this comment it becomes clear that if child labor exists in this economy, the causes are purely distributional.

When parents and children care about each other’s utility, increases in parental income need not always lead to decreases in child labor. Adults raised in poor families make altruistic transfers to their elderly parents, which the parents take as repayment for income lost when their children were young and spent some time in school instead of work. There is some sufficiently high level of parental income at which children cease to believe that parents need a transfer, whereas parents still would like repayment, so both transfers and the hours of extra education that the transfers made possible cease. Child labor rises.