The Consumption and Debt Response to Minimum Wage Increases

Following a minimum wage hike, household income rises on average by about $250 per quarter and spending by roughly $700 per quarter for households with minimum wage workers. Most of the spending response is caused by a small number of households who purchase vehicles. Furthermore, we find that the high spending levels are financed through increases in collateralized debt. Our results are consistent with a model where households can borrow against durables and face costs of adjusting their durables stock.

Aaronson, Daniel and Agarwal, Sumit and French, Eric, The Spending and Debt Response to Minimum Wage Hikes (May 29, 2008). FRB of Chicago Working Paper No. 2007-23, Available at SSRN: https://ssrn.com/abstract=1144222 or http://dx.doi.org/10.2139/ssrn.1144222