Microcredit & Labor Allocation : Evidence from Rural Ethiopia

We investigate the impact of microcredit borrowing on the labor allocation of Rural Ethiopians using 3 waves of LSMS-ISA panel data. While microloans are often associated with moderate average effects on welfare, we show that another possible way to grasp this question is to study the interaction between labor allocation and credit constraints. We employ alternative specifications in order to overcome the substantial threat of endogeneity that overshadows the evaluation of microfinance. The main identification strategy uses a method based on conditional heteroskedasticity and does not require an external instrument. Our model finds a positive effect of loan take-up on farm labor. The impact on total labor supply is ambiguous on average, but our findings illustrate heterogeneous impacts across borrowing communities