Global Child Labor and Schooling: Does Participation in Microfinance Program Change the Rates?

Purpose:Child labor is a problem that affects more than 168 million children worldwide working under conditions that are detrimental to their education, health and general wellbeing. This is a troubling phenomenon, begging for solution, as there are no documented long-term benefits associated with child labor. Although there is no one-to-one replacement rate, child labor, competing for child’s time, reduces education attainment. Since poverty and limited access to credit are the two main causes of child labor cited by theory, this paper examines the impact of microfinance program participation on child labor and education globally. It is hypothesized that removal of credit constraints as well as risk-coping effects from micro-loans could decrease the need for the use of child labor and increase schooling. Nevertheless, the expansion of household employment opportunities through larger or new microenterprises may represent a channel for a potentially negative impact of microfinance on schooling through an increase in the demand for child labor.

 

Method: The aggregate data was collected from the ILO, the World Bank and MIX Market datasets on microfinance for the 1980-2010 time period. Using fixed effects several models estimated the effect of microfinance participation on child economic activity and schooling outcomes such as: primary school enrollment and completion and secondary school enrollment rates. Separate models estimated the impact of the program on girls’ and boys’ labor market activity and schooling outcomes.

Results: The results illustrated a positive effect of microfinance on child labor as well as child schooling. Thus, participation in microfinance of families with children increases child labor while at the same time increasing primary school enrollment and completion, as well as secondary school enrollment rates. Further analysis showed that as families participate in microfinance activities, more of the older children (in secondary school) might start combining labor market activities with schooling, while younger children (in primary school) reduce their schooling as a result of increased labor market activities. No major differences were found between girls’ and boys’ supply of labor and school enrollment as a result of their families’ participation in microfinance activities. 

 

Implications for policy and research: Since microfinance was found to be positive affect child labor and schooling, it is hard to recommend policies that will promote microfinance participation in the countries where there is high child labor and low schooling rate. The countries facing low school enrollment rate may want to explore the option of increasing their microfinance programs support. However, future research will need to investigate the topic with a better data (including microdata) to understand the real impact of microfinance participation on child labor and schooling. The data collection strategies on child labor and schooling outcomes should focus on age differences and the factors that may have affected the time-allocation on labor and schooling activities differently. Additionally, studies will need to explore the mechanisms through which microfinance participation may affect time-allocation of the children on labor market and schooling activities. Avenues, such as microenterprise ownership due to credit provided by microfinance programs should be explored deeper.