Abstract
The debate surrounding the incidence of child labour and human capital formation encompasses various dimensions. While educational expenditure plays a crucial role in human capital formation, the theoretical general equilibrium literature places primary emphasis on a child’s schooling time as the only factor affecting human capital formation. Given this backdrop, using a multi-sector general equilibrium model, this article attempts to analyse the impact of trade and investment liberalisation on a child’s human capital formation and the incidence of child labour, considering the significant role of educational expenditure and schooling time in human capital formation. This article also highlights a paradox in the context of trade and investment liberalisation policies that could promote human capital formation and may simultaneously exacerbate the incidence of child labour. An intertemporal household optimisation exercise has been developed where the guardian chooses the child’s school time and educational investment. The formation of human capital depends on the amount of time a child spends in school and the level of educational expenditure. It also depends on the macro-environment captured through the prevailing skill premium in the economy. The findings revealed that the characteristics of developing economies play an important role in determining the impact of liberalisation policies. Additionally, this article explores the paradoxical outcome of the liberalisation policy, where improvement in human capital can happen at the cost of raising the incidence of child labour. The policy trade-offs are further illustrated through a numerical exercise, underscoring the complex policy challenges for developing economies.
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