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The Effect of Minimum Wages on Consumer Bankruptcy

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.


Suggested Citation

Legal, Diego, and Eric R. Young. 2022. “The Effect of Minimum Wages on Consumer Bankruptcy.” Federal Reserve Bank of Cleveland, Working Paper No. 22-24. https://doi.org/10.26509/frbc-wp-202224