Introduction to Econometrics 3rd Edition by James Stock, Mark Watson

Exercise 5

Read the box "What Is the Effect on Employment of the Minimum Wage " in Section 13.4. Suppose, for concreteness, that Card and Krueger collected their data in 1991 (before the change in the New Jersey minimum wage) and in 1993 (after the change in the New Jersey minimum wage). Consider Equation (13.7) with the W regressors excluded.
a. What are the values of X it , G h and D t for:
i. A New Jersey restaurant in 1991
ii. A New Jersey restaurant in 1993
iii. A Pennsylvania restaurant in 1991
iv. A Pennsylvania restaurant in 1993
b. In terms of the coefficients ß 0 , ßy, ß 2 , and ß 3 , what is the expected number of employees in:
i. A New Jersey restaurant in 1991
ii. A New Jersey restaurant in 1993
iii. A Pennsylvania restaurant in 1991
iv. A Pennsylvania restaurant in 1993
c. In terms of the coefficients /3 0 , /3j, ß 2 , and ß 3 , what is the average causal effect of the minimum wage on employment
d. Explain why Card and Krueger used a differences-in-differences estimator of the causal effect instead of the "New Jersey after-New Jersey before" differences estimator or the "1993 New Jersey-1993 Pennsylvania" differences estimator.