Child Labor, Income Shocks, and Access to Credit

Abstract

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, Beegle, Dehejia, and Gatti 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.

This paper - a joint product of the Poverty Team and Investment and Climate, Development Research Group - is part of a larger effort in the group to study the determinants of child labor. It is output from the research project "Child Labor and Access to Credit: Evidence from Rural Tanzania and Vietnam" funded by the Bank's Research Support Budget.