Child Labor: The Role of Income Variability and Access to Credit in a Cross Section of Countries

This paper examines the link between access to credit and child labor at a cross-country level. Even though access to credit is central to child labor theoretically, 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 level of financial development. These two variables display a strong negative (unconditional) relationship, and we show that even after controlling for a wide range of variables, including GDP per capita, urbanization, initial child labor, schooling, fertility, legal institutions, inequality, and openness, this relationship remains strong and statistically significant. Moreover, we find that, in the absence of developed financial markets, households resort substantially to child labor in order to cope with income variability. This evidence suggests that policies aimed at widening households’ access to credit could be effective in reducing the extent of child labor.