Hedonic-Based Labor Supply Substitution and the Ripple Effect of Minimum Wages

Brian J. Phelan

Journal of Labor Economics, 2019, vol. 37, issue 3, 905 - 947

Abstract: This paper analyzes a new explanation of the “ripple effect” of minimum wages based on how minimum wages affect hedonic compensation. Minimum wage hikes lower compensating differentials at low-skill undesirable jobs because they raise wages at the most desirable low-skill job, the minimum wage job. This change in hedonic compensation may cause some individuals to optimally leave low-wage undesirable jobs and seek more desirable employment. If labor supply falls at low-wage undesirable jobs, employers would raise wages, consistent with the ripple effect. Empirically, I provide evidence that hedonic-based labor supply substitution is taking place and contributing to the ripple effect.

Date: 2019
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