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

39 Pages Posted: 5 Feb 2017 Last revised: 7 Nov 2017

Lisa J. Dettling

Board of Governors of the Federal Reserve System

Joanne W. Hsu

Federal Reserve Board of Governors

Date Written: 2017-01-15

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 limit, Credit supply, Delinquency, Minimum wages, Payday loans

JEL Classification: D12, D14, J38

Suggested Citation

Dettling, Lisa J. and Hsu, Joanne W., Minimum Wages and Consumer Credit: Impacts on Access to Credit and Traditional and High-Cost Borrowing (2017-01-15). FEDS Working Paper No. 2017-010. Available at SSRN: https://ssrn.com/abstract=2911761 or http://dx.doi.org/10.17016/FEDS.2017.010r1

Lisa Dettling (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Joanne Hsu

Federal Reserve Board of Governors ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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