Does Illiquidity Alter Child Labor and Schooling Decisions? Evidence from Household Responses to Anticipated Cash Transfers in South Africa

This study considers the response of child labor supply and schooling attendance to anticipated social pension income in South Africa. For black households in South Africa, the social pension is large, highly anticipated, and shared across generations. Moreover, pension benefits are largely determined by age in South Africa's extremely poor black population, and this study uses the age discontinuity in the pension benefit formula for identification. The South African social pension thus presents an unusually clean test of the applicability of the Life-Cycle/Permanent Income model to child labor and schooling decisions in developing countries. In the present case, the data support the theory that liquidity constraints contribute to high levels of child labor. When households become eligible for the social pension in South Africa, the resulting increase in household non-labor income is associated with a sizeable decline in child labor and increases in schooling. Changes in child labor and schooling are largest among pensioners with little formal education. This finding suggests that the current emphasis in development policy of addressing child labor by attacking labor demand may be misdirected.