Child Labour and Human Capital in Developing Countries: A Multi-Period Stochastic Model

Abstract

This study investigates the co-determination of child labour and human capital acquisition through a life cycle model. It explores three categories of households with 0, 10 and 15 years’ education of household heads who also have differential access to financial markets. Results show that financially excluded, uneducated households prefer assets with negative returns over human capital investments in their offspring and, hence, fall into an intergenerational poverty trap. Their educational investments begin only after an income threshold is reached, and the same may be funded through transfers or withdrawal of educational subsidies from college educated households without lowering their human capital investments. Educational subsidies and higher access to educational inputs work best for middle educated households who have higher demand for education. For policy analysis, this study quantifies the contributions of income support, financial inclusion, lower uncertainty and subsidised education in reducing the supply of child labour.