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

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.