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.

This paper uses minimum wage hikes to evaluate the susceptibility of low-wage employment to technological substitution. We find that automation is accelerating and supplanting a broader set of low-wage routine jobs since the 2008–2009 financial crisis. Simultaneously, low-wage interpersonal jobs are increasing and offsetting routine job loss. However, interpersonal job growth does not appear to be enough, as it was prior to the financial crisis, to fully offset the negative effects of automation on low-wage routine jobs. Employment losses are most evident among non-Asian people of color who experience outsized losses at routine jobs and smaller gains at interpersonal jobs.