The Effect of Minimum Wages on Consumer Bankruptcy

50 Pages Posted: 9 Aug 2022

See all articles by Diego Legal-Cañisá

Diego Legal-Cañisá

University of Virginia - Department of Economics

Eric R. Young

University of Virginia

Date Written: August 9, 2022

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

JEL Classification: K35, J30, J38, E24, E44

Suggested Citation

Legal-Cañisá, Diego and Young, Eric R., The Effect of Minimum Wages on Consumer Bankruptcy (August 9, 2022). FRB of Cleveland Working Paper No. 22-24, Available at SSRN: https://ssrn.com/abstract=4185976 or http://dx.doi.org/10.2139/ssrn.4185976

Diego Legal-Cañisá

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Eric R. Young (Contact Author)

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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