Microinsurance in developing countries can help prevent child labor

Child labor is a common consequence of economic shocks in developing countries. A new IZA discussion paper by Andreas Landmann and Markus Frölich shows how reducing the vulnerability to such shocks can affect child labor and schooling. The authors exploit the extension of a health and accident insurance scheme by a Pakistani microfinance institution (MFI): on the hand the program was extended to include supplementary household members such as adult children of the client or other household members; on the other hand clients were assisted with claim procedures. Importantly, the extension of the insurance scheme was set up as a randomized controlled trial, which allows clean identification of the effects of the extension. The paper finds lower incidence of child labor and lower child labor earnings caused by the innovation. Separating the two parts of the innovation package, the effects of claim assistance are mostly insignificant, while increased insurance coverage strongly decreases child labor incidence, hours worked and days missed at school. The authors show that the positive outcomes are largely due to an ex-ante feeling of protection as opposed to a shock-mitigation effect.