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

Lisa Dettling and Joanne Hsu

No 2017-010, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Consumer debt; Credit cards; Credit constraints; credit limits; Credit supply; Delinquency; minimum wages; Payday loans (search for similar items in EconPapers)
JEL-codes: D12 D14 J38 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2017-01-15
New Economics Papers: this item is included in nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-10

DOI: 10.17016/FEDS.2017.010r1

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