Mortality risks, education and child labor∗

In this paper, we investigate the role of young adult mortality on child labor and educational decisions. We argue that mortality risks are a major source of risks in returns to education in developing countries. We show that, in the absence of appropriate insurance mechanisms, the level of child labor is inefficient, but it can be too high or too low. It is too high when parents are not very altruistic and anticipate positive transfers from their children in the future. Uncertain returns to education, endogenous mortality or imperfect capital markets unambiguously increase child labor. When the level of child labor is inefficiently high, we also show that a cash transfer conditional on child’s schooling can always restore efficiency regarding child labor. ∗This paper is part of Fernanda’s Phd thesis. For useful discussions and comments, we would like to thank Guido Friebel, Jean Hindriks, Pierre Pestieau, and Hosny Zoabi, as well as participants to seminars given in Public Economics Meeting at CORE, CORE-IDEI Conference in Public Economics (Toulouse), CRED Workshop, and Journées de l’AFSE 2005, two anonymous referees, and the editor for their insightful comments on former drafts of this paper. We would like to thank the MacArthur network on Inequality and Economic Performance and the CRED for financial support. This work is part of the Belgian Program on Inter-University Poles of Attraction initiated by the Belgian State, Prime Minister’s office, Science Policy Programming and of the Action de Recherches Concertees (Namur). †Corresponding author: Department of Economics, CORE, Catholic University of Louvain 34, Voie du Roman Pays 1348 Louvain la Neuve, Belgium Phone: +32.10.47.83.06 Fax: +32.10.47.43.01 E-mail address: [email protected]. ‡Department of Economics, CRED, University of Namur.