Human Capital Investment in the Presence of Child Labor

Policies that improve early life human capital are a promising tool to alter disadvantaged children’s lifelong trajectories. Yet in many low-income countries, children and their parents face tradeoffs between schooling and productive work. If there are positive returns to human capital in child labor, then children who receive greater early life investments 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 educational investment has persistent long-term consequences, resulting in lower household consumption. We instrument for child labor prevalence using local crop mix. We provide evidence that reductions in educational investment in response to positive early life shocks reduce overall welfare in high child labor districts.