The common model featured in this literature identify the household decision making process in determining child labor as subject to existing incentives and constraints the household is facing. A simple economic framework, following Betcherman et. al (2005), hypothesizes that children work instead of going to school because of some combination of the following:<sup>23</sup>

- _Incentives_ favor work, and

- _Constraints_ compel children to work.

The incentives problem arises when the economic benefits of a child working will be greater than expected benefits of schooling. In these cases, then, parents can be making economically rational decisions in sending their children to work. This situation – in effect, where the ratio of the net returns to education relative to work is negative -- will typically arise where education is too costly or offers little benefit. High costs can refer to either direct or opportunity costs of education. Opportunity costs may be high when children are needed for non-school activities that are critical for household welfare (e.g., helping with the harvest, fetching water).

Even when expected returns to education are favorable, and parents have an economic incentive to send their children to school, they might not be able to afford the current costs of schooling (including opportunity costs stemming from the income losses for children not working). Parents may be constrained from sending their children to school because of poverty or insurmountable short-term economic concerns. The direct costs of schooling may simply be unaffordable for chronically poor families or for families that are in a situation of transitory poverty because of a shock (e.g., job loss of a parent, drought, etc.). For many poor households, child labor constitutes the only mechanism for intertemporal allocation of resources (i.e., using child labor to borrow from the future for present consumption).

The incidence of child labor is high in Sub-Saharan Africa and South Asia regions, characterized mostly by low income countries (see figure 1). But this relationship is not linear and indicates that at very low levels of income, the effect of changes in per capita income on the incidence of child labor is the highest. There is also significant variation in the incidence of child labor even at similar levels of income, which indicates that factors besides poverty could increase or reduce the incidence of child labor. Some families and children have low perceived returns to education, while others face borrowing (and other) constraints to finance their children’s schooling. Microanalysis for Burkina Faso and Guatemala show that that the incidence of child labor increases when poor families are faced with income shocks.<sup>24</sup> Is the inverse relationship between incomes and the likelihood of child labor observed at the household-level within countries borne out, as we would expect it should, when we examine average incomes and the extent of child labor at the country-level?

_The effect of income constraints and poverty._

> 23 This framework is an adaptation of models presented in Bhalotra (2000) and Bhalotra and Tzannatos (2003) 24 Guarcello.Lorenzo, Mealli, and Rosati (2003) and Parent (2006).

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