Effect of Cash Transfer Policy on Child Labour and Human Capital Formation: Is There a Trade-Off?

The debate in the realm of public policy in reducing child labour and enhancing human capital formation encompasses various dimensions. Specifically, many scholarly works put focus on the cash transfer policy as a policy response to address child labour and fostering human capital development. In the domain of multi-sector general equilibrium, a wide range of scholarly works put focus on the policy responses for child labour and human capital formation. The majority of literature puts the primary emphasis on a child’s schooling time as the only factor affecting human capital formation. However, it is recognised that educational expenditure also plays a pivotal role in human capital formation. Against this backdrop, this chapter seeks to theoretically examine the impact of cash transfer policy on both child labour and human capital formation by considering a specific form of human capital function, where human capital is intricately connected to both child's schooling time and educational expenditure. By doing so, first, this chapter incorporates a two-period intertemporal household optimization framework. Secondly, a hybrid general equilibrium model has been adopted, incorporating both Jones (1965) and (1971). Third, the effects of cash transfer policy not only on child labour supply but also on educational spending and the formation of human capital are examined using a general equilibrium framework. Finally, a numerical analysis has elucidated the complex findings. It is found that cash transfer policy may produce counterproductive outcomes in tackling the problem of child labour and improving human capital formation. Furthermore, it is found that the initial condition with respect to the magnitude of the child labour problem in the economy determines the policy's effectiveness. The findings suggest some instances where the policymakers might face a trade-off where the policy produces favourable outcomes in terms of increased human capital formation at the cost of raising the incidence of child labour.