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

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  • Brian J. Phelan

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.

Suggested Citation

  • Brian J. Phelan, 2019. "Hedonic-Based Labor Supply Substitution and the Ripple Effect of Minimum Wages," Journal of Labor Economics, University of Chicago Press, vol. 37(3), pages 905-947.
  • Handle: RePEc:ucp:jlabec:doi:10.1086/702651
    DOI: 10.1086/702651
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    Cited by:

    1. Gregory, Terry & Zierahn, Ulrich, 2020. "When the Minimum Wage Really Bites Hard: Impact on Top Earners and Skill Supply," IZA Discussion Papers 13633, Institute of Labor Economics (IZA).
    2. Wiljan van den Berge & Emiel van Bezooijen & Anna Salomons, 2021. "The Young Bunch: Youth Minimum Wages and Labor Market Outcomes," CPB Discussion Paper 422, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Jeffrey Clemens & Lisa B. Kahn & Jonathan Meer, 2021. "Dropouts Need Not Apply? The Minimum Wage and Skill Upgrading," Journal of Labor Economics, University of Chicago Press, vol. 39(S1), pages 107-149.
    4. Orley Ashenfelter & Stepan Jurajda Jurajda, 2021. "Wages, Minimum Wages, and Price Pass-Through: The Case of McDonald's Restaurants," Working Papers 646, Princeton University, Department of Economics, Industrial Relations Section..
    5. Wiljan van den Berge, 2021. "The Young Bunch: Youth Minimum Wages and Labor Market Outcomes," CPB Discussion Paper 422.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Daniel Aaronson & Brian J. Phelan, 2020. "The Evolution of Technological Substitution in Low-Wage Labor Markets," Working Paper Series WP-2020-16, Federal Reserve Bank of Chicago.

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