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The Dissipation of Minimum Wage Gains for Workers through Labor‐Labor Substitution: Evidence from the Los Angeles Living Wage Ordinance

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  • David Fairris
  • Leon Fernandez Bujanda

Abstract

This paper utilizes worker‐firm matched data on city contract establishments affected by the Los Angeles Living Wage Ordinance to explore the extent of labor‐labor substitution following establishment of a minimum wage. We are able to test for substitution on observable and unobservable skill and demographic features and to measure the extent to which such substitution dissipates the benefits of a wage minimum for workers in affected firms. The results suggest substitution toward male, Latino, and black workers and workers possessing prior formal training. All are characteristics that generate a wage premium in this segment of the low‐wage labor market in Los Angeles. Evidence for substitution based on unobservables is presented as well. The latter is revealed by the finding that the “before” wages of workers who are new to city contract work following the ordinance are significantly higher, conditional on observable characteristics, than the “before” wages of city contract workers who were hired preceding the ordinance. We estimate that the initial wage gain for workers is dissipated by roughly 27% through labor‐labor substitution.

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  • David Fairris & Leon Fernandez Bujanda, 2008. "The Dissipation of Minimum Wage Gains for Workers through Labor‐Labor Substitution: Evidence from the Los Angeles Living Wage Ordinance," Southern Economic Journal, John Wiley & Sons, vol. 75(2), pages 473-496, August.
    • Handle: RePEc:wly:soecon:v:75:y:2008:i:2:p:473-496
    DOI: 10.1002/j.2325-8012.2008.tb00915.x
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    References listed on IDEAS

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    2. Emiel van Bezooijen & Wiljan van den Berge & Anna Salomons, 2024. "The Young Bunch: Youth Minimum Wages and Labor Market Outcomes," ILR Review, Cornell University, ILR School, vol. 77(3), pages 428-460, May.
    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. David Neumark & Peter Shirley, 2022. "Myth or measurement: What does the new minimum wage research say about minimum wages and job loss in the United States?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 61(4), pages 384-417, October.
    5. Redmond, Paul & McGuinness, Seamus, 2023. "The Impact of a Minimum Wage Increase on Hours Worked: Heterogeneous Effects by Gender and Sector," IZA Discussion Papers 16031, Institute of Labor Economics (IZA).
    6. Meiselbach, Mark K. & Abraham, Jean M., 2023. "Do minimum wage laws affect employer-sponsored insurance provision?," Journal of Health Economics, Elsevier, vol. 92(C).
    7. Laura Giuliano, 2007. "Minimum wage effects on employment, substitution, and the quality of the teenage labor supply: Evidence from personal data," Working Papers 0723, University of Miami, Department of Economics.
    8. Ahn,Jaebin & Choi,Jaerim & Chung,Sunghoon, 2022. "Labor Market Rigidity at Home and Multinational Corporations’ Flexible Task Reallocation Abroad," Policy Research Working Paper Series 10114, The World Bank.

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