Child labor: The role of financial development and income variability across countries

This article studies the relationship between child labor and the development of credit markets at a cross-country level. In particular, we examine whether financial development in the period 1960-95 is associated with a reduction in child labor, and whether it is plausible to view this relationship as causal. This is an important question for a number of reasons. First, although child labor is widely viewed as a source of concern (and has been since at least the nineteenth century), in the absence of perfectly functioning credit markets or without other market failures, it is not clear that child labor is an inefficient phenomenon. It could be the outcome of an optimal trade-off among the various uses of children's time. Second, it has been argued that the primary cause of child labor is poverty and, consequently, that economic growth will "automatically" eradicate child labor over time. However, to the extent that market failures are the actual cause of child labor, government intervention in the specific market where the inefficiency occurs is preferable (Grootaert and Kanbur 1995). Furthermore, since economic development is often a slow process, addressing issues of credit market imperfections provides an additional policy dimension in thinking about child labor.