In order to construct effective policies to address the problem of child labor, it is necessary to understand the circumstances that lead parents to send their children to work. That is the purpose of this essay. I make no attempt to survey the economic literature on child labor; Basu (1999) already provides an excellent review.
In section 2, I briefly describe some of the main features of child labor in developing countries. Poverty and child labor are mutually reinforcing: because their parents are poor, children must work and therefore remain out of school. As a consequence, these children grow up to be poor as adults and the cycle continues. In section 3, I discuss the first of two features of child labor that give it a central place in a vicious cycle of poverty. This is the fact that the primary costs of child labor are realized so far in the future. When financial markets are poorly developed, the separation in time between the immediate benefits and long-delayed costs of sending children to work can result in too much child labor. The second feature is that the costs and benefits of child labor are not only separated in time; they are borne by different people: the child suffers the main consequences, while other household members benefit. This problem of agency is discussed in section 4. Finally, section 5 concludes with a discussion of child labor policies.