In my thesis, I explored the macroeconomic effects of financial development on the most vulnerable workers in developing and emerging countries, focusing on child labor, working poverty and the informal sector. I also examined how financial products could be designed in order to help the poor to better handle shocks. Thus, my dissertation is divided into four chapters.

Chapter one analyzes the joint effect of financial development and income inequality on child labor in developing countries. Our results suggest that child labor is associated positively to financial development and inequality. In fact, with access to credit, households tend to invest in productive activities which increase the opportunity cost of education and the returns from child labor. Hence, we demonstrate that a better control of corruption makes financial development as well as education spending more effective in reducing child labor by improving education quality.

In the second chapter, while other works focus on absolute poverty, we consider the effect of financial development on the poor’s wages as labor is their main asset. We use bank penetration as a measure of access to financial services and also investigate how barriers to use financial services affect the prevalence of working poor. We show that more bank branches and mobile phone subscriptions (indirect measure of mobile banking) reduce the proportion of working poor. This result is more relevant in countries hit by macroeconomic shocks. A better access also benefits to the excluded non-poor who can in turn invest and reduce poverty through more growth.

In the third chapter, compared to the existing studies, we are the first from our knowledge to assess the joint impact of remittances and financial development on the informal sector size. We find that both financial development and remittances tend to reduce the spread of the shadow economy by channeling funds to the more productive activities. Moreover, they tend to be substitutes, indicating that households rely on remittances in countries with low level of financial development.

Finally, chapter four reviews innovative flexible financial products which can be used to help the more vulnerable to manage shocks. Our results suggest that, first barriers to open saving and checking account (like opening fees) need to be suppressed in order to increase the use of this service, generating more information on potential borrowers on the basis of the history and frequency of payments. Then, accumulated savings can be used as collateral for loan supplemented by insurance services. Mobile banking could also serve as a support for flexible financial services.

Overall, this thesis emphasizes that financial development can help reduce poverty through its effect on employment. It reduces working poverty and informal employment by promoting the development of productive formal activities and enabling the poor to better cope with shocks. But, an undesired effect is the increase of child labor with access to credit which can be limited by a better quality of education and governance. Thus, the effectiveness of financial development could be reinforced by enhancing the supply of flexible financial products so as to help vulnerable households to manage shocks without relying on child labor or poorly paid jobs.

Keywords: Financial development, financial services; child labor, decent work, vulnerability, informal sector shadow economy, underground economy, institutions, inequality, working poverty, developing countries, trickle-down effect, remittances, microfinance, flexibility, discipline, risk, shocks, index-based insurance, combined products.