Rainfall Variability, Child Labor, and Human Capital Accumulation in Rural Ethiopia

How does income uncertainty affect human capital investments in agrarian economies? Using child‐level panel data, I exploit a medium‐run change in mean‐preserving rainfall variability to identify the effects of income uncertainty on the child labor decisions and human capital investments of smallholder farmers in rural Ethiopia. I estimate that increased rainfall variability is associated with less child labor and more schooling, consistent with a diversification mechanism. These findings highlight the empirical relevance of income uncertainty for decision making and household investment in rural economies. I find no evidence that rainfall variability is associated with past, present, or future rainfall, nor with income, wealth, and agricultural outcomes. As such, residual variation in realized income shocks—the main confounding interpretation—does not appear to explain the results.