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

42 Pages Posted: 5 Feb 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 lift families out of poverty, while opponents argue that disemployment effects lead to net welfare losses. But these arguments typically ignore the possibility that minimum wage policy has spillover effects on other aspects of households’ financial circumstances. This paper examines how state-level minimum wage changes affect the decisions of lenders and low-income borrowers. Using data derived from direct mailings of credit offers, debt recorded in credit reports, and survey-reported usage of alternative credit products, we broadly find that when minimum wages rise, access to credit expands for lower-income households, who in turn, use more traditional credit and less high-cost alternatives. Specifically, for each $1 increase in the minimum wage, lower-income households receive 7 percent more credit card offers, with higher limits and improved terms. Further, there is a drop in usage of high-cost borrowing: payday borrowing falls 40 percent. Finally, we find that borrowers are also better able to manage their debt: delinquency rates fall by 5 percent. Overall, our results suggest that minimum wage policy has positive spillover effects by relaxing borrowing constraints among lower income households.

Keywords: Consumer debt, 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.2017.010

Lisa J. Dettling (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Joanne W. Hsu

Federal Reserve Board of Governors ( email )

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

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