Using Social Policy to Promote Financial Inclusion: Minimum Wage Policies and Families’ Access to Financial Services

It is expensive to be poor: a family making $25,000 per year can expect that 10% of their income will go to fees and interest on financial transactions. Many lower-income families lack the money needed to have sustained engagement with banking services, which often require minimum account balances and charge routine fees. Instead they turn to costly alternative financial services (AFS) like check cashers and payday lenders that meet short-term needs but can exacerbate financial difficulties.

Existing literature proposes interest rate and fee caps as a way to equalize access to high-quality financial services. Yet, these proposals are likely inadequate because they do not address the underlying problem of families’ insufficient income.

This project will evaluate how progressive social policy can enhance the financial inclusion of families by asking: does increasing the minimum wage improve families’ access to financial services?

The research leverages variation in policies within and across states over time, theorizing that increasing the minimum wage reduces demand for AFS and increases demand for lower-cost banking services as more families can afford sustained engagement with banks.

This hypothesis will be tested in two ways. First, the P.I. will develop an original longitudinal dataset from 1998–2019 that combines historical data on AFS and bank branch locations, state-level changes in minimum wages and AFS regulations. As minimum wages increase, there is an expectation that density of AFS storefronts within communities declines and the density of bank branches modestly increases in response to changing consumer demand for services. Second, the P.I. will use data from the FDIC’s Unbanked and Underbanked Survey (2009–2019) and logistic regressions to estimate how low-income families’ use of specific prime and subprime products varies by state minimum wage context. Findings will point to how and under what conditions social policies can have positive spillover effects and enhance families’ financial inclusion.

PRINCIPAL INVESTIGATOR

Megan Bea, assistant professor of human ecology and consumer science