Low Level Equilibrium Trap, Unemployment, School Quality, Child Labour and Human Capital Formation

This paper builds an overlapping generations household economy model and examines the impact of unemployment on child labour and the child's human capital formation and growth through the expectation of adult regarding future employability. The economy consists of two sectors- skilled sector and unskilled sector. If one individual is employed in skilled sector she gets wage proportional to human capital whereas unskilled sector gives a fixed return. Expected future earning of child is included in the parental utility function. Parental choice of schooling vis-a-vis child work is considered. We study the effect of change in unemployment rate, child wage, adult skilled labour wage, adult unskilled labour wage, responsiveness of wage to skill level, change in school quality on schooling and human capital growth rate. We find that in this model the decision regarding full schooling or partial schooling or zero schooling of child is based on parental level of human capital as well as school quality. Increase in child wage will increase schooling and human capital growth rate only if adults earn less than subsistence consumption expenditure. We also find that as the responsiveness of skilled wage to human capital increases, schooling and rate of growth of human capital formation increase but if there is no unemployment then schooling hour and growth rate will be independent of responsiveness of wage to human capital, lower is the employment rate in the skilled sector, lesser is the time devoted to schooling by the child. Increase in unskilled adult wage may or may not decrease child labour. But if there is no unemployment increase in unskilled adult wage will result in decrease in the incidence of child labour and increase in schooling and rise in growth rate. The model dynamics exhibits the possibility of low level equilibrium trap. Suitable policies to escape child labour trap are discussed as well