Microcredit, Labor, and Poverty Impacts in Urban Mexico

• Date: 01 November 2013
• Published date: 01 November 2013
• Author: Miguel Niño‐Zarazúa
• DOI: http://doi.org/10.1111/rode.12063

Microcredit, Labor, and Poverty Impacts in

Urban Mexico

Miguel Niño-Zarazúa*

Abstract

Improved household accessibility to credit is a significant determinant of intra-household allocation of

labor resources with important implications for productivity, income, and poverty status. However, credit

accessibility could also have wider impacts on poverty if it leads to new hires outside the household. This

paper contributes to the existing literature on microcredit in two important ways. First, it investigates the

routes through which microcredit reaches those in poverty outside the household. We test whether by

lending to the vulnerable non-poor microcredit can indirectly benefit poor laborers through increased

employment. Second, we conduct the study in the context of urban poverty Mexico. This is relevant when

considering that labor often represents the only source of livelihoods to the extreme urban poor. Our find-

ings point to significant trickle-down effects of microcredit that benefit poor laborers; however, these

effects are only observed after loan-supported enterprising households achieve earnings well above the

poverty line.

1. Introduction

It is now widely understood that credit markets ration loans to those in poverty. In

developing countries in particular, credit markets suffer from informational asym-

metries, which raise the need for collateral and therefore exclude those with low

capital endowments. Caskey et al. (2006), for instance, report that about two thirds

of low-income households living in the Metropolitan area of Mexico City were

“unbanked”, and among those “anked”, only a small percentage had access to credit.

Credit rationing implies that households in poverty are not able to allocate their labor

resources optimally. In this context, the improved availability of credit to these groups

should lead to a re-allocation of their labor resources, with implications for their

productivity, income, and poverty status.

The improved access to credit could in addition have a wider impact on poverty if it

leads to new hires among fully or partially unemployed workers outside the loan-

supported household. The existing literature on microcredit, which focuses mostly on

rural areas, suggests that this wider impact on poverty through new hires is likely to

be small at best, partly because of labor-market rigidities. Khandker (1998) for

instance, finds in the context of rural Bangladesh, an increase in self-employment as

result of household participation in microcredit programmes, although most income-

generating activities rarely involved workers outside the household. Dasgupta and

Ray (1986) suggest that this is partly because at low levels of income, enterprising

* Niño-Zarazúa: World Institute for Development Economics Research (UNU-WIDER),

Katajanokanlaituri 6B, 00160 Helsinki, Finland. Tel: +358-9-615-99220; Fax: +358-9-615-99333; E-mail:

Miguel@wider.unu.edu. I want to thank Paul Mosley, Armando Barrientos, Malcolm Harper, Karl Taylor

and Jenny Roberts and seminar participants at the Universities of Sheffield, Manchester, and Stockholm

for valuable comments on previous versions of this paper. Special thanks are due to Fincomun, CAME, and

Promujer-Mexico for their support throughout data collection. I wish to acknowledge financial support

from the National Council of Science and Technology of Mexico. All the errors are mine.

Review of Development Economics, 17(4), 747–762, 2013

DOI:10.1111/rode.12063

© 2013 John Wiley & Sons Ltd

households can only afford to employ unskilled and malnourished laborers with very

low productivity. Informational constraints regarding the productivity of potential

hires may also prevent enterprising households from hiring labor, with self-

employment perceived as the less risky choice. However, if a household reaches the

upper limit of its available labor supply, then new hires can emerge as a strong alter-

native for production, with implications for the poverty status of poor laborers.

Mosley and Rock (2004) report significant impacts on poor laborers employed by

loan-supported enterprising households, members of microcredit programs operating

in Africa. The extent to which microcredit leads to increased employment among the

extreme urban poor is crucial, especially as labor often represents the only source of

livelihoods for this group.

This paper explores this issue employing quasi-experimental data collected from

three microcredit programs operating in Mexico. The study contributes to the litera-

ture on microcredit impacts in two important respects. First, the study focuses on the

spatial dimension of urban poverty. This is critical when considering that, unlike in

rural markets; labor often represents the only source of earnings for the extreme

poor. We exploit the spatial dimension to deal with endogeneity problems in the

econometric estimation procedure presented below. Second, we investigate the routes

through which microcredit reaches those in extreme poverty outside the household.

We test whether, by lending to non-poor enterprising households, microcredit organi-

zations can indirectly benefit poor laborers through increased employment.

2. Microcredit and Labor Supply

As a starting point for the examination of the relationship between microcredit and

labor supply, it is useful to consider, for expositional purposes, the hypothetical case

of an enterprising household engaging in an income generating activity to produce a

market good y, based on a Cobb–Douglas type production function, y=f(L,K)α,

where Land Kare the quantity of labor and capital, respectively, and αis a param-

eter of production technology. As pointed out by Pitt and Khandker (1996), it is very

unlikely that at the bottom-end of the income distribution technology changes, at

least in the short-term, so αis assumed to be constant.

In the production of y, the enterprising household is assumed to supply the

amount of labor Lh, constrained to the number of household members of working-

age, i. This is defined as LNi

H

ih h=

()

[]

Max

,, implying that under self-employment,

labor supply equals the maximum number of hours worked, h, contributed by

household members of working-age. If production technology does not change, an

injection of capital from microcredit will increase production through household-

level labor supply up to Lh, the point at which the allocation of labor resources is

maximized. Through this mechanism, microcredit is reported to have a positive

impacts on self-employment (Khandker, 1998; McKernan, 2002). However, if more

labor is required for production, then hiring laborers outside the household may

become a sensible choice. New hires are not only a function of household earnings

from production but also of the cost of hiring efficient labor. Leibenstein (1957),

Mazumdar (1959), and Dasgupta (1993) have pointed out that labor efficiency is

conditional upon factors such as nutritional status, individual abilities, skills and

efforts that determine labor productivity. Dasgupta and Ray (1986) have also shown

that at low levels of household earnings, non-poor enterprising households that are

considering employing laborers as a result of having reached their upper limit of

labor supply could find that they can only afford to employ workers with very low

748 Miguel Niño-Zarazúa

© 2013 John Wiley & Sons Ltd