Child Labor, Income Shocks, and Access to Credit*

Although a growing theoretical literature points to credit constraints as an important source of inefficiently high child labor, little work has been done to assess its empirical relevance. Using panel data from Tanzania, we find that households respond to transitory income shocks by increasing child labor, but that the extent to which child labor is used as a buffer is lower when households have access to credit. These findings contribute to the empirical literature on the permanent income hypothesis by showing that credit-constrained households actively use child labor to smooth their income. Moreover, they highlight a potentially important determinant of child labor and, as a result, a mechanism that can be used to tackle it. World Bank Policy Research Working Paper 3075, June 2003 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. * We thank Jishnu Das, John Strauss, Steven Zeldes, and seminar participants at George Washington University, the NEUDC 2002 conference, the World Bank, and the World Bank Economists’ Forum for useful comments. Dehejia acknowledges the National Bureau of Economic Research and the Industrial Relation Sections, Princeton University, for their kind hospitality. Support from the World Bank’s Research Committee is gratefully acknowledged. Please address correspondence to [email protected].