Child Labor: The Role of Financial Development and Income Variability across Countries

Abstract

In this article, we examine the link between child labor and financial development using cross‐country data. We show that child labor and financial development display a significant negative relationship, which is particularly strong in the sample of low‐income countries and is robust for a wide range of specifications and estimators, including fixed‐effects and instrumental variables. We identify a plausible channel through which financial development affects child labor, as we find that income variability has a sizable, positive impact on child labor in countries where financial markets are underdeveloped, although this is not the case when financial markets are developed. Our results suggest that policies aimed at widening access to credit could be effective in reducing the extent of child labor.