Child Labor: The Role of Income Variability and Credit Constraints Across Countries

This paper examines the relationship between child labor and access to credit at a crosscountry level. Even though this link is theoretically central to child labor, so far there has been little work done to assess its importance empirically. We measure child labor as a country aggregate, and credit constraints are proxied by the extent of financial development. These two variables display a significant negative relationship, which is particularly strong in the sample of low income countries. We show this relationship to be robust to selection on observables (by controlling for a wide range of variables such as GDP per capita, urbanization, initial child labor, schooling, fertility, legal institutions, inequality, and openness), and to selection on unobservables (by allowing for fixed effects). Moreover, we find that, in the absence of developed financial markets, households appear to resort substantially to child labor in order to cope with income variability. This suggests that smoothing of income shocks is one of the channels through which financial development affects child labor and that, as a result, policies aimed at widening households’ access to credit could be effective in reducing the extent of child labor. Rajeev Dehejia Roberta Gatti Department of Economics and SIPA Development Research Group Columbia University The World Bank , MC3-353 420 W. 118 Street, Room 1022 1818 H Street, N.W. New York, NY 10027 Washington, DC 20433 and NBER [email protected] [email protected]