Is Child Work Necessary?

This paper investigates why children work by studying the wage elasticity of child labour supply. It is argued that a negative wage elasticity favours the hypothesis that poverty compels work whereas a positive wage elasticity would favour the alternative view that children work because the relative returns to school are low. Using data for 2400 households in rural Pakistan, we estimate structural labour supply models for boys and girls, conditioning on full income and a range of demographic variables. We find that the income effect of a wage change dominates the substitution effect, producing a forward falling labour supply curve or one that is negatively sloped at low wages. We conclude that the poverty hypothesis dominates in this region though the evidence is stronger for boys than for girls. This suggests that trade sanctions or bans on child labour may be undesirable in the short run unless households are compensated for the loss in income. On the other hand, policies targeted at alleviating poverty or liquidity constraints are likely to reduce the prevalence of child work. Existing studies have concentrated on the income elasticity, but this tells us nothing other than that leisure is a normal good. This is the first structural analysis of child labour and the first that estimates and draws inferences from the wage elasticity.