Do Payday Loans Cause Bankruptcy?
Payday loans offer convenience and easy access,
but in return, consumers pay a large premium in
the form of extremely high service fees and interest
rates, with average APRs around 460 percent. Consumer
advocates argue that these short-term loans often trap borrowers
in a long-term cycle of debt, with loan balances
quickly escalating beyond a borrower’s ability to repay. If
this is the case, do payday loans cause bankruptcy?
Using administrative data from a large payday lending
company and publicly available personal bankruptcy
data, Paige Marta Skiba and Jeremy Tobacman compared
borrowers with relatively similar credit profiles and found
that payday loan access increases the probability of filing
for bankruptcy. Specifically, they examined first time
payday loan applicants who were either above or below
the minimum credit score threshold required to qualify
for a loan (within a narrow margin), allowing them to effectively
compare borrowers with similar credit profiles
based on whether they had access to payday loans or
not. Skiba and Tobacman showed that approval of a first
payday loan results in a pattern of subsequent borrowing
from the payday lender and interest on the payday loan
balance accounts for a sizeable share of the borrowers’
total debt interest burden at the time of bankruptcy filing.
Specifically, for first-time applicants near the bottom quintile
of the credit-score distribution, access to payday loans
caused the risk of Chapter 13 bankruptcy filings over the
next two years to double.
These findings suggest that payday loan approval could
tip applicants, who are already financially stressed, into
bankruptcy. The results can help to inform the ongoing
policy debate over reforming predatory lending practices
and suggest that safer, more responsible small dollar loan
products may be necessary.
Skiba, Paige Marta and Jeremy Tobacman. (2009). “Do
Payday Loans Cause Bankruptcy?”
Hospitals and Workforce Development
Unemployment continues to be a challenge in
low- and moderate-income communities, particularly
as the recession has caused entire industry
sectors to fold, displacing thousands of workers
in the process. High growth economic sectors, such as
healthcare, can provide new employment opportunities
to those looking for work, but do certain industries hold
more potential for lifting low- to middle-skilled, low-income
workers out of poverty?
Marla Nelson and Laura Wolf-Powers use data from
the Bureau of Labor Statistics to conduct a “chain-wise”
analysis that allows them to answer the following question:
does the creation of new jobs in certain industries
lead to vacancies higher up the career ladder, leading
some workers to move up into more stable, well-paying
jobs? They estimate the total number of job vacancies that
would be created through the creation of new jobs in four
industries: hospitals, accommodations, legal services,
and securities and commodities. The model allows them
to estimate not only who gets the newly created jobs,
but also who moves up to better positions through the
newly created vacancies. They find that job growth in the
accommodations sector creates job vacancies that have
the greatest immediate impact on a region’s unemployed
and discouraged workers, but most of the vacancies in
the industry are in the lowest paid positions. In contrast,
job growth in the legal services and securities and commodities
sectors have significant upward mobility effects,
but these opportunities are limited to those with extensive
education and training. However, growth in hospital
employment has the greatest potential to improve the
well-being of low-income workers, as vacancies initiated
by employment growth in hospitals have a substantive
impact on unemployed and discouraged workers, and
create work in the middle of the wage scale, in middleskilled,
moderately paid positions as well.
The authors suggest that economic development investments
in health care must be combined with strategies
to promote skills attainment and upward movement
for low-paid health care workers.
Nelson, Marla and Laura Wolf-Powers. (2010). Chains
and Ladders: Exploring the Opportunities for Workforce
Development and Poverty Reduction in the Hospital
Sector. Economic Development Quarterly, 24(1), 33–44.
The Effect of Shared Housing on Formerly
Living with a roommate is generally much more
cost efficient than living alone, as expenses such as
rent and utilities can be shared across occupants.
However, many federal assistance programs targeting
homelessness impose a substantial implicit tax on shared
housing. For example, Supplemental Security Income
reduces the payments an eligible person receives if he lives
with an ineligible person. Such policies would be understandable
if shared housing (which is different from a group
home) somehow adversely affected its users, but does a
shared living arrangement negatively affect residents?
Based on an analysis of the Access to Community Care
and Effective Services and Supports data set, which provides
detailed longitudinal data for over 6,000 formerly
homeless participants, Yinghua He, Brendan O’Flaherty,
and Robert Rosenheck found that shared housing does
not adversely affect residents. The analysis followed
shared housing participants over the course of a year, and
collected various indicators on their well-being, including
quality of life, mental health, depression, drug and
alcohol abuse, personal safety and social support. Comparing
baseline results to outcomes after three months,
and then again after one year, the study found no statistically
significant indication that living alone is associated
with better outcomes than shared living among formerly
homeless people. In some cases, sharing actually improved
outcomes—sharing was associated with reductions
in symptoms of psychosis.
While the study suggests that shared living produces
similar outcomes to living alone, the authors do not
suggest shared living as a preferred policy prescription.
Rather, they argue that federal housing assistance, food,
and income maintenance programs should be reformed
to provide greater consumer choice, which includes
shared living as an equal option.
He, Yinghua, Brendan O’Flaherty, and Robert A.
Rosenheck. (2010). Is shared housing a way to reduce
homelessness? The effect of household arrangements
on formerly homeless people. Journal of Housing
Economics, 19 (2010) 1–12.
The Impact of Low Income Housing Tax Credits
on Local Schools
The Low Income Housing Tax Credit (LIHTC) program
produces more affordable housing units for low-and
moderate-income households than any other government
program. While the production of below-market
rate units is desirable from a community development
perspective, existing homeowners may exhibit NIMBYism
(“not in my backyard”), citing concerns about potential
changes in neighborhood characteristics or perceptions
of decreases in public services. One oft-cited concern is
that an influx of children from low-income families will
lead to overcrowding in classrooms and potential negative
peer-effects, thus reducing the quality of local schools. But
does the LIHTC program actually have an impact on local
Analyzing data on LIHTC properties and accountability
ratings and other characteristics of impacted schools
in Texas, Wenhua Di and James Murdoch found little evidence
to suggest that LIHTC units have a negative effect on
local schools. Overall, there was no systematic correlation
between changes in school demographics and the developments
of LIHTC projects in the neighborhood. In fact,
Di and Murdoch found that an increase in the number of
nearby LIHTC units was associated with an increase in the
probability that the nearest school moved upward in its
accountability rating. However, the potential effects were
likely to differ across neighborhoods with different characteristics.
LIHTC projects were more likely to have positive
effects on schools in higher income areas but negative
effects on schools in higher minority areas.
These findings may alleviate some of the concerns of
residents in higher income areas around LIHTC projects.
However, the evidence that LIHTC units had a negative influence
on higher minority areas may suggest that neighborhoods
of concentrated poverty may limit the advancement
opportunities for children.
Di, Wenhua and James Murdoch. (2010). The Impact
of LIHTC Program on Local Schools. Working paper
presented at the American Economics Association 2010
Annual Meeting. April, 2010.