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Minimum Wages and Consumer Credit : Impacts on Access to Credit and Traditional and High-Cost Borrowing

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Abstract

Proponents of minimum wage legislation point to its potential to raise earnings and reduce poverty, while opponents argue that disemployment effects lead to net welfare losses. But these arguments typically ignore the possibility of spillover effects on other aspects of households' financial circumstances. This paper examines how state-level minimum wages affect the decisions of lenders and low-income borrowers. Using data derived from direct mailings of credit offers, survey-reported usage of high-cost alternative credit products, and debt recorded in credit reports, we find that higher minimum wages increase the supply of unsecured credit to lower-income adults, who in turn, use more traditional credit and less high-cost alternative credit like payday loans. Further, delinquency rates fall and credit scores rise in both the short run and one year later. Overall, our results suggest that minimum wage policy has positive spillover effects by relaxing borrowing constraints among lower-income households, thereby reducing borrowing costs. This reduction in borrowing costs can increase disposable income by 20-110 percent more than the direct effect on earnings alone.

Suggested Citation

  • Lisa J. Dettling & Joanne W. Hsu, 2017. "Minimum Wages and Consumer Credit : Impacts on Access to Credit and Traditional and High-Cost Borrowing," Finance and Economics Discussion Series 2017-010, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2017-10
    DOI: 10.17016/FEDS.2017.010r1
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    References listed on IDEAS

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    Cited by:

    1. Aaronson, Daniel & Agarwal, Sumit & Hotchkiss, Julie L. & Kelley, Taylor, 2019. "Job displacement and financial outcomes," Economics Letters, Elsevier, vol. 177(C), pages 18-21.
    2. Regmi, Krishna, 2020. "The effect of the minimum wage on children’s cognitive achievement," Labour Economics, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Consumer debt; Credit cards; Credit constraints; Credit limit; Credit supply; Delinquency; Minimum wages; Payday loans;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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