Financial literacy reduces likelihood of child labour

Financial literacy reduces likelihood of child labour

By: Dr. Romi Bhakti Hartarto

Ending child labour is one of the key targets of the eighth goal in the Sustainable Development Goals, which aims for decent work and economic growth. This goal is essential due to the high prevalence of child labour in developing countries, where at least one in five children between the ages of 5 and 17 are engaged in child labour. Despite international conventions addressing child labour, such as the ILO Convention No. 138 on minimum working age, ILO Convention No. 192 on the prohibition and elimination of child labour, and the UN Convention on the Rights of the Child, the issue persists and requires further attention.

Child labour can have detrimental effects on the mental and physical well-being of children. Their education is at risk, and their rights as children are limited, ultimately affecting their future. Unfortunately, this cycle could continue to the next generations. Boys are more vulnerable to becoming child labourers compared to girls. According to UNICEF’s global data for 2020, 11.2% of boys were child labourers, while the number was 7.8% for girls. However, girls tend to be more involved in unpaid household activities, while boys are more susceptible to paid physical labour.

As a developing country with the fourth-largest population in the world, Indonesia is not immune to child labour issues. According to the latest data from the Central Statistics Agency in 2022, there were approximately 1 million child labourers in Indonesia, accounting for 2.4% of children aged between 10 and 17 years. The percentage of child labour in Indonesia has fluctuated over the past five years. The number of child labourers peaked at 3.3% during the early stages of the COVID-19 pandemic, as the pandemic forced children to assist their families in earning additional income. A survey by the Indonesian Child Protection Commission (KPAI) in nine provinces in 2020 revealed that 69.2% of children helped their families financially during the pandemic. Moreover, 50% of parents believed that children should contribute to earning income while at home.

Interestingly, the high expectation for children to contribute to family income is related to the gap between financial literacy and financial inclusion. The 2022 National Survey on Financial Literacy showed that the financial literacy index, which measures knowledge, skills, confidence, and behaviour in financial decision-making and management, stood at only 49.7%. This figure is significantly lower than the financial inclusion index of 85.1%, which measures access to formal financial products and services by the general population. A lack of financial literacy alongside financial inclusion is believed to contribute to child labour. The difficulty in obtaining credit due to limited financial literacy might prompt parents to involve their children in labour activities during economic downturns that reduce family income.

A 2023 empirical study in Indonesia using data from the Indonesia Family Life Survey in 2014 also supported previous findings, demonstrating a negative correlation between financial literacy and child labour. Higher financial knowledge among parents regarding loan providers and ownership of savings accounts correlated with a lower likelihood of child labour in households. Therefore, financial literacy among parents plays a crucial role in reducing child labour in Indonesia.

The root cause of child labour is, and has always been, poverty. Access to microcredit accompanied by business and financial education has been shown to increase income and savings, as demonstrated in Bolivia. This, in turn, could lead to a reduction in child labour, particularly if the loan amount is sufficient for productive investment. Additionally, the quality of education should be considered, along with the opportunity cost of schooling for children, given that low financial literacy is also associated with misinformation about the returns on long-term investments in education for children.

The author is an Assistant Professor at the Department of Economics, Universitas Muhammadiyah Yogyakarta. He is currently a Postdoctoral Research Fellow at the Ungku Aziz Centre for Development Studies, Universiti Malaya.


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