The Spending and Debt Response to Minimum Wage Hikes

65 Pages Posted: 13 Jun 2008 Last revised: 12 Feb 2011

Daniel Aaronson

Federal Reserve Bank of Chicago

Sumit Agarwal

Georgetown University - Department of Finance

Eric French

Federal Reserve Bank of Chicago; Department of Economics

Date Written: May 29, 2008

Abstract

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.

Keywords: consumption, minimum wage, debt, liquidity constraint, durables

JEL Classification: D1'8 J3, E21

Suggested Citation

Aaronson, Daniel and Agarwal, Sumit and French, Eric, The Spending and Debt Response to Minimum Wage Hikes (May 29, 2008). FRB of Chicago Working Paper No. 2007-23. Available at SSRN: https://ssrn.com/abstract=1144222 or http://dx.doi.org/10.2139/ssrn.1144222

Daniel Aaronson (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Eric French

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States
312-322-5322 (Phone)
312-322-5111 (Fax)

Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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