Child labor is widely used for measuring the poverty level in a country. Several researchers have proved in the past that there is a strong relationship between the amount of children employed within a country's labor market and the population income per capita. But what are the reasons for a high number of child-workers? This article by Dehejia and Gatti (2002) investigates the role of income variability and access to financial products on child labor in different countries by measuring the level of financial development (i.e. to what extent banks collect funds and provide loans and mortgages).
The theory behind the relationship between child labor and access to financial products is based on a trade-off that a family faces for its children: is it better to allow a child to study or to force him/her to work? Putting a child to work today raises the current income of the family, but by interfering with children's education, it reduces future income. Working kids are widespread especially in families employed in jobs which are highly exposed to weather conditions, expropriation, robbery and similar negative shocks. Access to financial products would allow for these families to smoothen income variability by providing insurance services, pension schemes and other financial instruments aimed at reducing the dependence of households' income on children's labor. As a consequence children's education would not be disrupted and it would guarantee them a higher future wage.
The first two sections of the article by Deheija and Gatti (2002) introduce the wide literature that theoretically proves a negative relationship between access to financial products, child labor and poverty level. Section 3 provides strong empirical results confirming the existence of a significant relationship between child labor and the amount of money deposited in banks as a share of GDP. Phrased differently, the authors find that a higher amount of money deposited in bank accounts is usually associated with lower levels of child labor within a country. Financial market development could be effective in reducing child labor and the impact of income volatility on households wealth thus without lowering family welfare.