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Hutchins Roundup: Small business loans, tipped minimum wage, and more 

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Federal incentives for banks increase small business lending in low-income areas   

The Community Reinvestment Act (CRA) is intended to encourage banks to lend more in low-income neighborhoods. Mee Jung Kim of Sejong University, Kyung Min Lee of the World Bank, and John S. Earle of George Mason University note that the incentives for banks put in place by the CRA are relatively limited, mainly affecting supervisory ratings that impact approvals of mergers and acquisitions and banks’ local reputation. By comparing similar census tracts just above and below the income threshold for CRA eligibility, the authors find that the number of small business loans in a neighborhood subject to the CRA increase by about 3% to 4%, and the dollar amount of those loans increases by about 6% to 10%. Given the positive impact of eligibility on lending even under weak enforcement, they argue, strengthening the CRA’s incentive structure would further increase lending in low-income areas.   

Higher tipped minimum wage rates cause job loss among restaurant workers   

In most states, employers are allowed to pay tipped workers less than the statutory minimum rate, so long as workers’ total earnings including tips reach the statutory minimum. Recent policy debate has focused on eliminating this “tip credit.” Exploiting the variation in tipped minimum wages across states and over time and comparing workers working at full-service (tipped) and limited service (untipped) restaurants, David Neumark and Maysen Yen of the University of California, Irvine, find that an increase in the tipped minimum wage rate does not increase overall earnings but reduces employment among tipped workers. The authors also find that, unlike an increase in the general minimum wage, a higher tipped minimum wage is not associated with lower rates of poverty among those affected.  “A general minimum wage increase, as compared to elimination of the tip credit, does more to increase incomes of workers in the lowest-income families, and spreads the benefits to more workers,” the authors conclude.   

E-Cigarette Taxes Increase Youth Smoking   

In 2019, between 15% and 20% of middle- and high-school students used electronic nicotine delivery systems (ENDS), such as e-cigarettes, while 6% to 8% used cigarettes. Rahi Abouk of William Peterson University and co-authors find that increasing taxes on ENDS reduces youth ENDS use but increases cigarette use. Their results suggest that if Congress were to double the cigarette tax to $2.01/pack and set an equivalent ENDS tax, as proposed in the Tobacco Tax Equity Act of 2021, ENDS use would decrease by more than 5 percentage points but cigarette use would increase between 2.3 and 3.7 percentage points. The authors conclude that “given current evidence suggesting smoking is substantially more dangerous than using ENDS, the health costs from greater youth smoking as a result of ENDS taxes may outweigh benefits from reduced youth ENDS use.”   

Chart of the week: After growing steadily in prior months, jobs in the restaurant industry declined sharply in August 

  Bar chart of the monthly change in employment at food services and drinking places from January 2021 to August 2021

Source: The Wall Street Journal

Quote of the week:  

“The Great Recession led employers to raise their expectations; the dynamics in the COVID-19 recovery have led workers to raise theirs. It is now workers holding out for a better match … It is possible that the start of the school year and the end of enhanced unemployment benefits will naturally bring people back into the labor force. But if they don’t return, then employers may need to change their recruitment strategy to widen their eligible candidate pool and pull in workers from the sidelines,” says Thomas Barkin, President of the Richmond Fed 

“Coming out of the Great Recession, we saw labor market dynamics have a lasting impact. Employers’ expectations of who and how they recruit became engrained in hiring processes. Coming out of the COVID-19 recession, we could see labor market pressures lead employers to open doors to new populations — which would be good news for our future workforce and economy. If that happens, then what has started out as yet another divided recovery has the potential to leave behind an entirely different legacy.”   


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Sophia Campbell

Senior Research Assistant - Hutchins Center on Fiscal and Monetary Policy

Nasiha Salwati

Research Assistant - The Hutchins Center on Fiscal and Monetary Policy

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