This paper examines the relationship between child labor and access to credit at a cross-country 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 strong negative relationship, which we show is 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 by allowing for a nonparametric functional form), and to selection on unobservables (by allowing for fixed effects). We find that the magnitude of the association between our proxy of access to credit and child labor is large in the sub-sample of poor countries. Moreover, in the absence of developed financial markets, households appear to 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.
Published as Dehejia, Rajeev H. and Roberta Gatti. "Child Labor: The Role Of Financial Development And Income Variability Across Countries," Economic Development and Cultural Change, 2005, v53(4,Jul), 913-932.