Cash Transfers: The Key to Keeping the World's Working Kids in School?

A new paper from Eric V. Edmonds and Norbert Schady finds that cash transfer programs in developing countries may keep kids in school and out of the labor force. From the abstract:

Poor women with children in Ecuador were selected at random for a cash transfer equivalent to 7 percent of monthly expenditures. The transfer is greater than the increase in schooling costs at the end of primary school, but it is less than 20 percent of median child labor earnings in the labor market. Poor families with children in school at the time of the award use the extra income to postpone the child’s entry into the labor force. Students in families induced to take-up the cash transfer by the experiment reduce their involvement in paid employment by 78 percent and unpaid economic activity inside their home by 32 percent.

Their research highlights the unpleasant fact that child labor is usually driven by grim economic circumstances: “Our findings highlight the central role that poverty plays in the child labor decision, and suggest the possibility of effecting large changes in child labor with relatively modest investments in poverty relief.”  (HT: Chris Blattman)

Daniel Walker

I find this stuff fascinating. Unconditional cash welfare is kind of the "new thing" in developmental economics, and there is a lot to be said for it (both for and against).

I used to research the mechanism for why these programs work. The traditional reasoning is something out of a Micro Econ 101 class: Households face a decision between sending their kids to school and sending their kids to work, and the cash transfer acts as an income shock that shifts incentives towards schooling.

However, It doesn’t look like the changes in school attendance come “on the margin” as the abstract, and the forgoing reasoning, suggests. Investigations of a cash transfer program in Mexico have shown that when times are good, communities that receive the cash transfer have similar school attendance to communities that don’t. On the other hand, when times are bad the attendance rates are markedly higher in communities that receive the transfer than communities that do not, even after adjusting for income differences.

In other words, you can (and I think should) think of these cash transfers as a proxy for insurance rather than a transfer of income. Insurance market failures in poor places are probably one of the big reasons for the “poverty trap” we see today. If regulators can address the problem of insurance and risk in poor places, we might find a more effective welfare program than cash transfer.



I understand that this has led to an adverse selection in children as poor and unwed mothers are having more children to get a higher subsidy. As the children grow out of school age they will no longer be useful but will be unwanted and unaffordable.
What will happen? In 20 years we will find out.
In theory this sounds good, but it does have potential problems.

Nicole Faby

Conditional cash transfer programs generally cap the number of children that for whom each family can receive cash transfers.