Question

2. Card and Krueger (1994) estimate the effects of minimum wage on employment of fast-food industry. The below table reports the average full-time equivalent (FTE) employment per restaurant FTE Employment New Jersey Pennsylvania Before 23.3 20.4 After 21.2 21.0 a) Calculate the difference-in-difference estimate for the effect of minimum wage on employment. The standard error for the difference-in-difference estimate is 1.3. Is the estimate statistically significant at 5% level? The minimum wage had increased by 20% Calculate the labour demand elasticity based on the difference-in-difference estimate b) What are the treatment and control groups? Carefully state the required assumption for the difference-in-difference estimate to represent the causal effect of minimum wage on employment. If the assumption holds, what is the counterfactual employment for the treatment group? c) Is the finding consistent with a competitive labour market? Is the finding consistent with a monopsony market? Explain

Answer 1

A)

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B) The result variable here is employment, the law was enforced in New Jersey when it was not enforced in Pennsylvania which is taken as New Jersey counterfactual. In order for the DID to retain its significance, it is necessary that the two countries act in the same way in terms of employment trends if the treatment is not provided i.e. employment trends NJ would have behaved in the same way as Pennsylvania in the lack of the minimum wage law.

C) The finding is inconsistent with a competitive labor market, as in a competitive labor market, rises in the minimum salary increase the downward demand curve for labor. This causes the reployment to drop. On the other side, the findings here are positive, which is improving jobs with the application of the minimum salary legislation.