IZA DP No. 1686: Educational Attainment and Child Labor: Do Subsidies Work?
We analyze the role of education subsidies in affecting child labor where a family chooses the quantity of children, the level of educational attainment and the fraction of time an offspring spends on child labor. This is relevant because following the threat of trade sanctions and suspension of GSP privileges, many developing countries are aggressively pursuing educational policy to reduce the incidence of child labor. We find that education subsidies may increase (or reduce) the equilibrium level of education and child labor depending on the relative weight that a family attaches to quality. The latter depends on the educational attainment level. We find that subsidies that target fixed and those that target variable costs may lead to opposite effects on child labor. Given that established subsidy programs like PROGRESA have both variable and fixed components, this finding assumes special relevance. It is interesting to note that the empirical literature in this area has found that a rise in the cost of schooling decreases child labor in some countries while increasing it in others. Our findings suggest that there may be reasons for observing such apparent contradictions.