Strapped for Cash: The Effect of Wages and Minimum Wage Increases on Delinquency Risk for Residential Mortgages

Abstract

This paper offers empirical insight into the effect of wage changes and minimum wage increases on the performance of first-lien, fixed-rate residential mortgages in the U.S. between 2012 and 2016. I take two separate approaches, specifying a two-way fixed effects model for an aggregate analysis of county wage changes on delinquency risk and a difference-in-differences model for an analysis of state minimum wage increases on delinquency risk. I find statistically significant and positive average treatment effects on the probabilities of delinquency, default, and current loans turning delinquent in the year following West Virginia’s 2015 and 2016 minimum wage increases. I also obtain statistically significant effects for these same response variables in the aggregate analysis of delinquency risk, though with precisely the opposite sign.