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Gravatar: Paolo Casini, Olivia Riera, Paulo Santos Monteiro

The Heterogeneous Effects of Microcredit on Labour Market Outcomes

20.04.2015Paolo Casini, Olivia Riera, Paulo Santos Monteiro

In 2013, we ran a detailed household survey in Cape Verde. We were interested in studying how access to finance influences the behaviour of beneficiaries in the labour market. Microfinance generally aims at fostering self-employment, but most of the businesses financed through it are very small and, hence, they rarely involve all household members. If within a household there are unemployed members, the fact that another member is able to start or improve a petty business through a microloan, can affect the household's total income and hence influence the incentives of the unemployed to search for jobs.

In a recent paper, we study this phenomenon in details. We developed a simple model in which household members make collective decisions about consumption. There are investment opportunities available but, to take advantage of them, households need a loan since they are poor. At the same time, some household members may be unemployed and looking for work. In general, relaxing credit constraints changes the investment opportunities available to households and improves their livelihood. But, how does improved access to credit affects the incentives to search for work facing the unemployed labourers?

Our model shows that the impact of improved access to credit on search intensity by the unemployed is ambiguous, as it is affected by two competing effects. Having access to finance may raise search intensity, as it increases the return to the household's net-worth. In fact, by finding a job, the unemployed worker can contribute to the investment with her/his salary and hence reduce the size of the loan. This reduces the cost of finance and raises the household's net-worth.

But, at the same time, unemployed individuals in households with better access to finance enjoy a positive income effect that lowers the incentive to search. In fact, the investment has a positive return and allows for larger household aggregate consumption.

Which effect dominates depends on within-household bargaining power. We prove that when the bargaining power of the unemployed member is high the positive net-worth effect is relatively stronger and, hence, improved access to credit is more likely to raise search effort by the unemployed. Intuitively, when household members pool resources and make decisions collectively, the share of consumption each member can enjoy depends on her/his power to influence decisions. This is an easily testable prediction for our data, which contains detailed information on labour search behaviour of unemployed individuals.

We find robust support for the model's predictions. We use variables such as gender, schooling achievements, household size and the role in the household as exogenous proxies for individual bargaining power. As predicted by the model, these controls influence significantly the effects of improved credit access on individual job search intensity: access to microfinance lowers search intensity among unemployed workers with low bargaining power, but increases search intensity among unemployed workers with high bargaining power.

Overall, our results suggest that the behaviour of unemployed household members is affected by access to credit in a non-trivial way, potentially undermining the positive effects of microfinance. This implies that when poorly targeted, access to finance programs can lower the incentives to search for a job, making the overall impact on welfare ambiguous. To improve the impact of microfinance on labour market outcomes, the screening of beneficiaries should not be solely based on characteristics of the entrepreneurial activity and of individual borrowers, but also on characteristics of the households they belong to. In particular, the within-household distribution of decision power is fundamental. We have proposed some simple indicators of bargaining power that are easy to measure and scrutinize. If used to improve targeting, they can improve the impact of access to finance, generating positive externalities in terms of labour market outcomes.

This blogpost is based on the academic study Labour market effects of improved access to credit among the poor: Evidence from Cape Verde, prepared by Paolo Casini, research affiliates at LICOS, University of Leuven and currently working for the European Commission, Olivia Riera, PhD candidate at LICOS, University of Leuven and Paulo Santos Monteiro, Lecturer in economics at the University of York.

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