Transactional preferences: Ethical consumption and the minimum wage

By: Anna Becker, Attila Lindner, Kristóf Madarász and Heather Sarsons.

Abstract

A growing number of studies suggest that minimum wages have limited disemployment effects while at the same time increasing output prices. This finding contradicts the "law of demand", which states that output demand, and therefore employment, should fall whenever prices increase. We propose a simple framework to explain this fact and to highlight some aspects of ethical consumption more generally. Consumers derive extra utility when engaging in transactions that can be associated with positive moral attributes. In the context of the minimum wage, consumers derive a higher marginal utility when they know that the good they are consuming is produced by a worker earning a higher wage. Combined with firms' inability to credibly commit to higher wages, a mandated minimum wage policy can lead to higher output and positive employment effects simultaneously. We implement an online survey experiment in the U.S. to test the proposed mechanism.

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