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

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.

The Local Aggregate Effects of Minimum Wage Increases

“…The annual data cover 1999-2017. Indeed, anticipatory durable goods spending is quite large, consistent with recent work suggesting minimum wage increases relax credit constraints (see Dettling and Hsu 2017). The estimates include location (CPI MSA) fixed effects as well as year effects.…”

“…40 Our results are also consistent with Dettling and Hsu (2017), which also uses the CCP and shows that increases in the minimum wage cause a decrease in credit card delinquency, an increase in the number of credit cards, and increases in credit scores for likely minimum-wage workers-defined as individuals in census tracts where the majority of adults have less than a high school education. The annual data cover 1999-2017.…”

“…4 Our results on the importance of the share of low-wage workers-across cities and in goods production-are consistent with the literature that focuses on the employment effects of minimum wage changes for teenage and/or fast-food workers or restaurant-industry price changes (see, e.g., Card and Krueger 1994, Aaronson, French, and MacDonald 2008, Basker and Kahn 2016. Dettling and Hsu (2017) further document more direct-mail credit card offers for low-income individuals following minimum wage increases. MaCurdy (2015) shows that increases in the national minimum wage raise consumer prices across goods in a way that is more regressive than a typical state-level sales tax increase, and that this effect is large enough to completely neutralize the direct benefits for the working poor.…”

“…In addition, recent findings by Dettling and Hsu (2017), as well as our own, suggest that cost-benefit analyses of social policies such as an increase in the minimum wage should consider interactions with credit markets and financial well-being more generally. Prices and consumption increase, especially in the food sector, where firms tend to employ a large number of minimum-and low-wage workers.…”

“…Dettling and Hsu (2017) finds no effect on card balances or utilization. Dettling and Hsu (2017) finds no effect on card balances or utilization.…”