June 2020

IZA DP No. 13405: Here Comes the Rain Again: Productivity Shocks, Educational Investments and Child Work

forthcoming in: Economic Development and Cultural Change, 2021

In predominantly agrarian economies with limited irrigation, rainfall plays a critical role in shaping households' incomes and subsequently their spending decisions. This study uses household-level panel data from a nationally representative survey in India to estimate the effect of agricultural productivity shocks – as proxied by exogenous annual rainfall deviations from long-term average – on education expenditures and children's work status in rural Indian households. Our results show that a transitory increase in rainfall significantly reduces education expenditures and increases the likelihood of child labor across a range of work activities. Additionally, we show that productivity-enhancing inputs such as land ownership and credit access do not mitigate these countercyclical effects of rainfall variations, indicating the importance of market imperfections (in labor and land markets). We also find that the effects of productivity shocks are reinforced for historically marginalized castes, and moderated for more educated households. These highlight that the average effects mask considerable heterogeneity based on household and regional characteristics.