Child Labor, Income Shocks and Access to Credit

This paper investigates the extent to which income shocks lead to increased incidence of child labor. It examines whether access to credit to households helps mitigate the effects of income shocks and reduce child labor. Using household panel data from the Kagera region of Tanzania, the paper shows that:

• Households respond to transitory income shocks by increasing child labor;
• Extent of using child labor as a buffer is lower if households have access to credit;
• Poverty does not necessarily lead to child labor;
• Imperfections in labor markets, education and credit markets are probable causes of child labor;
• Policies designed to correct above imperfections may prove efficient in tackling child labor.

Finally, the paper shows that:

• Child labor increases significantly in response to crop losses due to calamities;
• Credit-constrained households actively use child labor to smooth their income;
• Households use child labor as a mechanism to tide over transitory income shocks;
• The availability of assets compensates the effect of income shocks on child labor;
• Expanding access to credit is somewhat effective in reduction of child labor.

This is a World Bank Policy Research Working Paper no. 3075, June 2003.