Working Paper

The Effect of Minimum Wages on Consumer Bankruptcy

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;

https://doi.org/10.26509/frbc-wp-202224

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2022-08-09

Number: 22-24