Child labor has obtained increasing interest as a research subject since the mid-1990s. One of the
factors for this is the growing concern over reducing poverty among those who are the most vulnerable to
exogenous shock, particularly working children. Another factor is the recognition of the importance of
human capital accumulation as a source of development, and the incidence child labor as a major
impediment to economic development.
In their seminal paper, Basu and Van [1998] proposed the “Luxury Axiom,” which states that
poverty is the fundamental determinant of child labor, and a number of subsequent studies support this
hypothesis (Basu and Tzannatos [2003]).
On the other hand, there is a study that failed to uncover a positive relationship between poverty
and child labor (Nielsen [1998] in Zambia, Ray [2000] in Pakistan).
Other counter examples are proposed by Bhalotra and Heady [2003], Canagarajah and Coulombe
[1997], Edmonds and Turk [2002], and Kanbargi and Kulkarni [1991].
Using data from Pakistan and Ghana, the study by Bhalotra and Heady [2003] on the “Wealth
Paradox” found that greater poverty does not lead to greater child labor. They proposed an interesting
analysis of the Wealth Paradox as the mere effects of farm size on child labor. The hypothesis was based on
their remarkable observation that children from land rich households are more often found in work than
children from land poor households. We term this phenomenon the Wealth Paradox. Its basic theoretical
model is derived from the example of a peasant household in an economy with imperfect markets for labor,
land, and credit, which allows two periods to capture the impact of child work in period 1 on productivity
in period 2. This model simply signifies that the ownership of productive assets, especially land, can affect
child labor in various ways: (i) the effect arrives through both the gain in work experience and the possible
decrease in educational attainment because this can have negative wealth effects, with large land holdings
generating a higher income, making it easier for households to forgo the income that child labor yields, and
(ii) the capital market imperfection that results in lower interest rates for households, which can offer land
as collateral and reinforce the wealth effect, allowing large landowners to borrow more to meet insurance
needs or finance their children’s education.