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Economic theories of child labour have, with a few exceptions, been based on some shared premises. First, that child labour is socially undesirable and its reduction a worthy goal. Second, that there are other, more desirable, activities in which a child can engage, namely school attendance and leisure. Third, that the child labour decision is a prerogative of the parent, not of the child. However, the parent is motivated not by narrow self-interest but by a rational and benevolent outlook which takes into account the welfare of the whole household, including that of the child. In this context, the parent shares in the undesirable consequences of child labour.

If parents dislike child labour, then the decision to impose it upon their children must be based on the economic conditions facing the household. It is fair to say that a single factor has been emphasized in all economic explanations of child labour: abject poverty. But in precisely what fashion does poverty influence child labour? This is where differences arise.

Child Labour and Adult Labour:

In 1998 Basu and Van showed that the link between child labour and poverty can be mutually reinforcing. They construct a model in which children can either work or enjoy leisure. Parents value the latter and not the former. However, child leisure is a “luxury” in that only sufficiently rich households can afford to “buy” it. Also, child workers can substitute for adult workers in the labour market, even though each child may be only fractionally as productive as an adult. This substitutability implies that entry into the workforce by children leads to a fall in wages for adults. This reinforces the absence of child leisure.

These possibilities bear several interesting implications. First, individual households have no control over which outcome occurs. Even if individual parents were to withdraw their own children from work, this would raise market wages only slightly; to move the wage sufficiently requires withdrawal of children by a significant proportion of households.

Child Labour and Credit Markets:

A second strand of research has studied the tradeoff between labour and schooling. This overlaps with a large and influential body of research, known as "endogenous growth theory". This theory maintains that long-run, sustainable growth is made possible by continuous increases in an economy's stock of knowledge. Education plays an integral part in this process by disseminating knowledge across the population. There are also spillover effects: in an economy where a large proportion of workers are educated, even the uneducated ones are more productive and receive high wages. A high incidence of child labour obviously interferes with these mechanisms of economic prosperity and growth.

Credit markets can affect the tradeoff between child labour and schooling. It is widely believed that by acquiring at least primary education, children are able to enhance their wage-earning potential later in life. Whether this is true or not is open to question, one that we shall discuss later on. In any case, any increase in wages accrues only after the schooling process is over, which could take five years at the minimum. During this period, the household forgoes the income the child could have earned by working instead. If households could borrow at reasonable terms against the child's higher future earnings, sending children to work might be unnecessary. In the absence of credit, however, the lost income from the child's formative years could very well tilt the balance against schooling. This implies that if credit markets allow households to borrow against their child’s future earnings, child labour will cease to exist so long as the returns from education are high enough.

A related theory put forward by Jacoby and Skoufias explained that parents treated child labour as buffers during harsh economic times: Children were sent to school during periods of relative prosperity and were made to work during the time of hardship.

Education Quality and Child Labour:

As mentioned in the preceding subsection, credit markets can affect the tradeoff between child labour and schooling. The extent of this tradeoff depends, inter alia, upon the returns to education, which in turn depend upon the quality of schools. Most economists assume that the returns to education are high enough so that in the presence of a perfectly functioning credit market, child labour would not exist. This is partly under the influence of the empirical literature on endogenous growth theory, which has found that higher schooling levels in developing countries can have growth-enhancing effects on their economies. However, even if the overall impact of schooling is positive, this does not mean that all schools in a country impart an education of sufficient quality to benefit its recipients.

Studies done in Asia and Sub-Saharan Africa by Psacharopoulos report discounted returns on the order of 20-40 percent. Such rates of return imply that borrowing for children's education would be profitable even at interest rates of 20 percent per annum or higher. But studies by Jean Dreze indicate that in most rural parts of northern India the state of education was so bad that parents did not see the point of sending their kids to school.

Child Labour and Poverty Traps

While all economic studies touch upon poverty as a causal factor in child labour, one branch of the literature emphasizes the reverse, i.e. child labour as a cause of poverty. This literature studies child labour decisions for successive generations of the same family. In any generation, children who work do not go to school and do not acquire the skills needed to earn decent wages as adults. Upon becoming parents themselves, they send their own children to work. Yet another generation misses out on an education and, in its own turn, sends its own children to work. This vicious circle is known as a “poverty trap”.


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