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Consumer Loan Response to Permanent Labor Income Shocks: Evidence from a Major Minimum Wage Increase

Listed author(s):
  • Guney, Ibrahim Ethem

    ()

    (Central Bank of Turkey)

  • Hacihasanoglu, Yavuz Selim

    ()

    (Central Bank of Turkey)

  • Tumen, Semih

    ()

    (Central Bank of Turkey)

We investigate the impact of a substantial minimum wage increase, which became effective in January 2016, on consumer loans in Turkey. Using bank-level data and designing an original identification strategy, we ask whether the loans provided by banks with a historically high share of low-wage loan customers have increased relative to those provided by banks with a historically low share of low-wage loan customers after January 2016. Our results suggest that consumer loan flows have displayed a limited but statistically and economically meaningful increase following the minimum wage hike. This increase mostly comes from the increase in long-term general-purpose loans. Vehicle loans have also increased, while there is no change in housing loans. In the overall, the minimum wage hike has generated a moderate and transitory increase in the flow of consumer loans extended to low-wage earners in Turkey – perhaps due to delayed consumption effect. Consumption of durables, which can further increase household borrowing capacity through collateralized debt channel, has only slightly and temporarily increased. The underlying long-term trends in the stock of consumer loans have hardly changed.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10751.

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Length: 32 pages
Date of creation: Apr 2017
Handle: RePEc:iza:izadps:dp10751
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