Household Vulnerability and Child Labor: The Effect of Shocks, Credit Rationing and Insurance

Abstract

Building upon the social-risk management approach, this paper examines dimensions of household behavior that are important for risk management and reduction of vulnerability, beyond issues of consumption. This paper attempts to assess to what extent risk and vulnerability factors are relevant for household decisions concerning children's school attendance and labor supply. Particular focus has been given to the evaluation of the effect of shocks, credit rationing and insurance on household decisions concerning children's activities. On the basis of a theoretical approach based on well known results relative to human capital investment decision and children's labor supply, the paper developed an estimation strategy that allows an assessment of the importance of a set of risk factors. Because of the potential endogeneity of the variable of interest, a methodology based on propensity scores was applied. We also carried out a sensitivity analysis in order to assess the robustness of our causal inference with respect to unobservable household characteristics. The results indicate the relevance that the occurrence of shocks has for children's labor supply and school attendance. Credit rationing also appears to be an important cause of school attendance and, to a lesser extent, of child labor. This evidence, together with the role that insurance appears to play, strongly support the role of SMR approach in the area of child labor.