The Spending and Debt Response to Minimum Wage Hikes
Federal Reserve Bank of Chicago
Department of Finance, Georgetown University
Federal Reserve Bank of Chicago; Department of Economics
May 29, 2008
FRB of Chicago Working Paper No. 2007-23
Following a minimum wage hike, household income rises on average by about $250 per quarter and spending by roughly $700 per quarter for households with minimum wage workers. Most of the spending response is caused by a small number of households who purchase vehicles. Furthermore, we find that the high spending levels are financed through increases in collateralized debt. Our results are consistent with a model where households can borrow against durables and face costs of adjusting their durables stock.
Number of Pages in PDF File: 65
Keywords: consumption, minimum wage, debt, liquidity constraint, durables
JEL Classification: D1'8 J3, E21
Date posted: June 13, 2008 ; Last revised: February 12, 2011
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