Human Capital Investment in the Presence of Child Labor

Policies that improve human capital in early life are a promising tool for altering the lifelong trajectories of disadvantaged children. However, in many low-income countries, children and their parents face trade-offs between schooling and productive work. If there are positive returns to human capital in child labor, then children who receive more of some types of early life investments, such as those that improve health or nutrition, may attend less school. Exploiting early life rainfall shocks in India as a source of exogenous variation in early life investment, we show that child labor attenuates the positive effects of early life investment and increased early life investment increases school dropout in districts with high child labor. This lower investment in education has persistent long-term consequences in adulthood, resulting in lower household consumption. We show that our results are robust to instrumenting for child labor prevalence using local crop mix. Reductions in educational investment in response to positive early life shocks appear to reduce overall welfare in high-child labor districts.