The Effect of Minimum Wages on Consumer Bankruptcy

Diego Legal and Eric Young

No 22-24, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We use cross-state differences in minimum wage (MW) levels and county-level consumer bankruptcy rates from 1991-2017 to estimate the effect of changes in minimum wages on consumer bankruptcy by exploiting policy discontinuities at state borders. We find that Chapter 7 bankruptcy rates are significantly lower in counties belonging to states with higher MW compared to neighboring counties in the lower MW state: a 10 percent increase in MW decreases the bankruptcy rate by around 4 percent. Before the 2005 bankruptcy reform, this effect was almost twice as large as for the entire sample. Theoretically, we cannot sign the effect of MW on bankruptcy and credit utilization; we use a stylized consumption/saving model with default to illustrate the dependence on particular parameters and to provide intuition on how to interpret our results.

Keywords: Consumer bankruptcy; unsecured credit; minimum wage (search for similar items in EconPapers)
JEL-codes: E24 E44 J30 J38 K35 (search for similar items in EconPapers)
Pages: 50
Date: 2022-08-09
New Economics Papers: this item is included in nep-ban, nep-law and nep-lma
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Journal Article: The effect of minimum wages on consumer bankruptcy (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:94580

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DOI: 10.26509/frbc-wp-202224

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