THE EFFECT OF INCOME SHOCKS ON
CHILD LABOR AND CCTs AS AN
INSURANCE MECHANISM FOR SCHOOLING
Monica Ospina
Universidad EAFIT, Medellin Colombia
Indirect effects of CCTs
z CCTs have become the most important social
policy in LA
z A number of studies provide strong evidence of
the positive impacts of these programs on the
main targeted outcomes: school enrollment
z Behavioral changes could reinforce or offset the
short term impact of these programs
z Long-run poverty alleviation through investment in
human capital
Motivation
Evidence that poor and credit constrained
households use self-insurance instruments to buffer
shocks: child labor
FA conditions CCTs on children’s school attendance:
if the price effect is much larger than the income
effect of economic shocks, then CCTs can protect
children’s education under risk
Costs of uninsured shocks can be quite high in
terms of human capital accumulation
Role of FA in Colombia’s safety net
Objective
Has the program displaced child labor as a riskcoping instrument?
Test if child labor is used as a risk-coping
instrument for poor households in Colombia and
whether FA can crowd out this specific behavior
under credit constraints
 What is the impact of financial markets on
schooling
investments
undertaken
by
households?
 Test if school time displaces/complements work
time
Program FA
 FA is the most important welfare program of the Social Safety
Net in Colombia
Started operating in 2002 and has benefited approximately 1.5
million households
Educational and nutritional components: cash transfer is about
25% of their average income
Eligibility criteria: poor households with children less than 18
years old located in targeted municipalities (also displaced
households)
The program’s evaluation survey is representative of poor rural
households in Colombia
The program was not randomly assigned, but control towns are
broadly comparable to treatment towns
Panel data of treated and control households, 2002-2005, with
detailed data at individual, household and municipality level
Literature
Impact of uninsured shocks on school attendance
and child labor outcomes (Beegle, Dehejia, &
Gatti,2006; Duryea, Lam, & Levison, 2003; Guarcello,
Mealli, & Rosati, 2003; Jacoby & Skoufias, 1997)
Role of CCT programs on children’s school
enrollment and work decisions (Schultz (2004),
(Bourguignon, Ferreira, & Leite, 2003, Attanasio et al.,
2006)
Relationship between economic shocks and the
impacts of CCTs on school enrollment (de Janvry et
al.,2006; Maluccio 2005)
Theoretical framework
Model of human capital accumulation under
uncertainty and incomplete markets (Jacoby and
Skoufias, 1997)
Households maximize a utility function defined over
current consumption and future (children’s) consumption
Children’s time can be used either to further increase
current consumption through work, to accumulate human
capital, or for leisure
Human capital determines children’s future consumption.
The presence of credit rationing restricts the budget set of
the household and, if binding, will generate inefficiently
low level of investment in human capital.
Theoretical framework
The model predicts four possible outcomes for children’s
activities: a child can attend school full time, work full time, do
neither or combine work and school.
The decision of the household concerning the activities of their
children will be guided by an unobservable utility index I :
U=f(Z, X, C, S)
•Z indicates set of household characteristics including household
permanent income net of children’s contribution
•X indicates a set of proxies for the rate of returns to child work
and for cost and returns to schooling
•C indicates a set of variable relating to credit rationing, access to,
public or private, insurance mechanisms
•S indicates realized shocks
Data
Children’s types of activity, participation
percentages
Data
Frequency of shocks
Data
Mean statistic, access to insurance
Methodology
1. Probability of school enrollment and child labor
participation prior to the program under credit
constraints and income shocks: fixed effects probit
model
Results
Probability of school enrollment for children 7-17 years old prior to FA
Results
Probability of child labor for children 7-17 years old prior to FA
Methodology
2. Impact of the program (ATT): DiD Matching

Interactive effects with shocks and credit access

Outcomes:
 Intensive margin: children’s time at school and at work
 Extensive margin: participation in school full time, work full
time, and combined school and work
Results
ATT of FA program for the second round of the survey
Results
ATT of FA program for the second round of the survey
Conclusions
Poor rural households use child labor to cope with
income shocks, but at the expense of leisure or
studying time of children
Credit-constrained households have a higher
probability of using child labor as a risk-coping
instrument
FA provides strong incentives for children to
combine work and school when households are
exposed to shocks
FA can work as insurance for the schooling of the
poor but are not able to completely displace child
labor
Critical issues
1. Can CCTs fulfill role of safety net at times of
crises?
o Protects food consumption and school enrollment
o FA is not very effective in displacing risk-coping
instruments such as child labor
o Lack built-in flexibility to expand coverage to
households falling below poverty during crisis
2. Do CCTs generate behavioral changes of adults?
o So far no negative incentive effects on adult
work
o Future research: investments and income
generation