Chapter 3

Theoretical Framework

3.1 Introduction

Theoretical framework delivers groundwork in order to understand how these theories are
standing in current situation or circumstances. Different theories which are related with labor
supply, human capital or education and poverty are examined in this chapter. In this chapter
theories are arranged into three sections, section 3.2.1 discusses labor supply theories, 3.2.2
discourse human capital theory while poverty theories are deliberated in section 3.2.3. Last
section described the conclusion of this chapter.

3.2 Theoretical Framework

Theoretical framework is divided into further three parts, in first part labor supply theories
are discussed, second part elaborate how human capital effect child schooling while in last
part researcher examined the poverty theories under different school of thoughts.

3.2.1 Labor Supply Theories

In this section theoretical background related to supply side labor theories will discuss.

3.2.1.1 Classical Labor Supply Theory

Classical production function consist only one variable factor in the short run which is labor.
The labor supply theory based on assumption of homogeneous labor units. The main
determinants of labor supply are price of labor, population size, and labor force participation
rate, taste of consumer and geographic, occupational and educational distribution of the labor
force. This theory of labor supply is the function of actual real wage rate, while keeping other
factors constant. According to this theory labor supply curve positively sloped, as the wage
rate increases labor supply increases simultaneously. But after a certain increment in money
wage rate decrease the labor supply, at this situation financial position of working people
improved and they prefer more leisure than involve in labor activity. The initial increments in
money wage promote labor force participation at specific level and further increment start
decreases. So, labor supply curve positive sloped at initial increment level after it, it will be
backward bending or negative sloped.
Here in the following diagram labor supply taken on horizontal axis and wage rates on
vertical axis. At initial level labor supply L1 and wage rate W1 this is shown at point A, when
wage rate increased from W1 to W2 labor supply increases from L1 to L2 this is shown at B.
But after this point the increase in wage rate from W2 to W3 decrease the labor supply from
L2 to L3 this is shown at point C.

Diagram

So in above diagram from point A to B substitution effect out weight the income effect this
leads to positively sloped labor supply curve while from point B to C income effect out
weight substitution effect this leads to backward bending supply curve.

3.2.1.2 Keynes Labor Supply Theory

According to Keynes theory of labor supply workers only know money wage, they are
uncertain about price level. So, workers make decisions on the basis of expected price, this
expectation based on past information about price. Labor supply function depends on
expected real wage rate which is positive influenced the workers labor decision. The
increment in expected income due to increase in wage rate increases the labor supply.
According to the theory labor supply curve positive sloped when workers have some degree
of money illusion, they are not know about changes in prices except money wage.

3.2.2 Children School Investment Theory

In this section researcher discuss how human capital investment effect child schooling
decision in households.

3.2.2.1 Gray Becker Human Capital Theory

Gray Becker (1964) offered human capital theory that explains the character of human capital
enlargement on earnings of workers. He accentuated education and training is the most
influential investment in human capital. An outlay on education, health and technical
trainings is famous as investment in human capital. Forthcoming productivity of workers rest
on current investment in human capital similarly, current time period workers’ productivity
shows the earlier investment in human capital. Higher investment in human capital more will
be the yield on investment in the form of higher wages as investment increase working
capacity increases of workers and firm will hire this efficient labor to increase output at low
cost of production. Variations in human capital stock like education, skill and experience
results difference in earn income. Wealthy families more investment in human capital and
leave greater non-labor income for their children while on the other hand poor household less
invest in children human capital as well as leave small bequest for their siblings. So, when
parents are made more investment in child human capital there will greater chances of higher
child schooling and fewer chances of child labor.

3.2.3 Poverty Theories

In this section researcher discuss how poverty theories affect household characteristics. These
theories are given below

3.2.3.1 Classical Theory of Poverty

According to this theory there were two reasons behind the problem of poverty first people
make wrong choices which influence their productivity and create the problem of poverty,
second differences in genetic capabilities is another cause of potential poverty. Sometimes
individual makes wrong choices which disturb their working capacity or productivity and
productivity of individuals negatively related with poverty while reverse is true when
individual makes correct choices. Another potential cause of poverty is genetic abilities and
people have more genetic abilities face no chances of poverty while reverse is true for low
genetic abilities people. From the first reason people choices are fluctuate around the welfare
or poverty trap. According to these economists govt. help poor people through supportive
policies and made arrangements for such people participate in labor market.

3.2.3.2 Neo Classical Theory of Poverty

This theory of poverty to some extent is similar to classical theory. According to this theory
discriminated initial endowments (skill, capital and talent), market failure and random shocks
are the cause of poverty. In perfectly competitive market disparity in initial endowments
determines individual productivity which further creates poverty. People have inefficient
skill, less capital and talented produce less and face more chances of poverty. While on the
other hand people who have high skills, talent and capital produce more and face less or no
chances of poverty. Market failure includes externalities, moral hazard, adverse selection and
less information are the cause of poverty. Less or incomplete information is another cause of
poverty which is inversely related with it. Random shocks like sickness, recession and family
breakdown etc. in the life of poor people play a major role this effect poverty positively that’s
why poor people become poorer in such shocks. They suggested that micro credit scheme
become helpful to promote skills, capital and talent of destitute peoples.

3.2.3.3 Keynesian Theory of Poverty

This theory of poverty is also known as liberal theory of poverty. According to this theory
market failure and underdevelopment symbols are the reasons behind the problem of poverty.
The effects of market failure in one sector transmitted to other sectors so, a nation would
remain under poverty trap. Keynesian incorporates low capital in the form of human,
business, infrastructure, natural, public institutions and knowledge. While low human capital
includes poor health, skills and education, low business capital includes poor conditions of
machinery and buildings, bad infrastructure includes poor system of transportation sanitation
and power and poor knowledge of capital know how this is directly affect human
productivity. They are suggested that economic growth in a nation leads to economic
development which further overcomes the problem of poverty and monetary or fiscal policy
helpful to reduce involuntary unemployment.
3.2.3.4 Marxian Theory of Poverty

Marxian economist examined that operational or physical factors like specific or biased labor
markets and corruption are the reasons behind the problem of poverty. Unnaturally wages are
lower as compared to marginal productivity of labor in capitalistic societies. Higher marginal
productivity of labor and low wages discourage laboring class and create the problem of
unemployment which further create or increase the chances of poverty in such societies. They
explored there are different classes of labor in market and prevailing discrimination among
them. To combat structural problems it is necessary to introduce no discriminated laws and
reforms of labor markets which further control unemployment and poverty. They also viewed
that poverty could be reduced through strict govt. regulation by implementing minimum
wages. According to this theory the initial purpose of Govt. regulation must be improve the
labor working conditions and enhance high wage rates.

3.3 Conclusion

From above analysis labor supply curve positively sloped under both school of thoughts, it
means that as wage increases labor supply increases and low income household send their
children for work. This satisfied the income argument of child labor. High human capital
stock plays an important role in children investment decision, high child schooling means low
poverty and fewer chances of child labor. Here different poverty theories also discussed to
explore the elements of household poverty. These theories provide deep insight of regarding
these issues.