Relative Affluence and Child Labor - Explaining a Paradox

Some micro level empirical studies questioned the validity of the poverty hypothesis of child labour. In some cases child labour incidence found to be increasing even with improvement in the economic conditions of the poor. This paper provides a possible explanation as to why increase in absolute income may not be sufficient to solve the problem of child labour, at least in some cases. We argue that people in general are not just concerned about their own consumption; they are very much affected by the consumption of their peers. While taking decisions regarding the time allocation of their children between work and leisure, parents do keep an eye on their relative position in the society. We may have a situation where the absolute income of the poor is increasing but their relative position is the society is deteriorating and this may lead to an increase in child work. We develop a theoretical model of household decision making to show that child labour supply from a poor family can increase even with improvements in its economic conditions if the family’s relative position in the society deteriorates and if the relative concern effect is sufficiently strong.