The Role of Capital-Skill Complementarities in Child Labor & Schooling

Abstract

We explore complementarities between parents' investment in their children's human capital and firms' investment in physical capital as a determinant of child labor and schooling in developing economies. In the first essay, we develop a theoretical model where human and physical capital investments are shown to be decreasing in firms' cost of investing in skill-biased capital, increasing in the quality of education, and decreasing in the cost of education. Our contribution is two-fold. First, when there is a unique equilibrium, there is an unambiguous improvement in the welfare of all agents in response to policies that improve the quality of education or lower the cost of education or skill-biased capital. Second, this welfare improvement can be achieved by policies that target only a proportion of workers or firms. In the second essay, we test the theoretical proposition that human capital investments respond to changes in the returns to education in India. Using National Sample Survey data, we first estimate the rates of return to primary, middle, high school, and college education for males and females in each Indian state for four separate years - 1983, 1988, 1993, and 1999. The response of children's participation in child labor and schooling to the rates of return to primary and middle school is then examined. We find that child labor amongst both boys and girls, falls in response to higher rates of return to education. However, only boys' participation in school increases in response to higher rates of return to education. In the third essay, we first examine changes in relative wages and returns to education in India from 1983 to 1999, which coincides with India's liberalization of trade and investment. We then conduct a simple demand and supply analysis using the non-parametric method proposed by Katz & Murphy (1992) to examine alternative explanations for changes in relative wages in India. We find that relative demand changes contributed significantly to changes in relative wages and that international trade in manufactures predicts increases in the relative demand for both high-skilled men and women.