[MUSIC] Next we are going to look at one of the most famous examples of difference-in-differences.
What is the effect of the minimum wage on employment?
If you pass the minimum wage, are more people get jobs or do people get fired and employment
goes down?
Well that's exactly what Card and Krueger looked at in their 1994 study.
Here's the data, and here's the main table - let's see what they found.
Well, in New Jersey, in 1992, the minimum wage was increased from $4.25 to $5.05.
So what they did is they surveyed fast food restaurants in New Jersey before the minimum
wage law was passed, and after it was enacted.
So here's New Jersey.
“Full-time employment before, all available observations.”
So 20.44 people on average worked in a fast food restaurant in New Jersey.
So here they say, “each part-time worker counts as half of a full-time worker.”
So that's what a full-time equivalent means: we're counting part-time people as half of
a full-time worker.
So about 20.5 people worked there before the minimum wage was increased.
Then after the minimum wage was increased, employment went up to 21 people.
So it increased by about half a worker, so that's what the before and after comparison
suggests: that the minimum wage law increased employment by half a worker.
But as we've discussed before, maybe there's some other trends, some other variables that
are changing over time that would explain this this difference of 0.59 workers.
So what are we going to do?
We need to find some control group we can get the common trend from, and extract out
the common trend here, so that we are left with just the effect of treatment, the effect
of a minimum wage law.
So what Card and Krueger did is they also surveyed stores in neighboring Pennsylvania.
They surveyed fast food restaurants there before and after the minimum wage law changed
in New Jersey.
So in Pennsylvania, the minimum wage was also 4.25 an hour, but it was not increased.
So there, the stores did not get treated in either time period.
So before the New Jersey law was passed, in Pennsylvania the average full-time equivalent
employment was 23 people per store.
And then after the law was passed, it went down to 21.17 people per store, for a difference
of 2.16 people.
So that suggests that the overall trend in employment in fast food restaurants was going
down.
Maybe they're introducing new technologies or whatever that are causing stores to need
less workers in general.
So overall trend was going down, but in New Jersey, employment actually increased.
So that suggests that if we look at the difference between the two differences of New Jersey's
change before and after, and then subtract off the common trend from Pennsylvania, we
get this number here: our difference-in-difference estimate of the causal effect of the minimum
wage on employment: 2.76.
So that suggests that the minimum wage actually increased employment in fast food restaurants
by almost three people, which is quite a big effect.
And if you look at the standard deviation here, shown in parenthesis, and you use this
and our rule-of-thumb to get a confidence interval, you find that this effect is also
actually statistically significant.
So, not only do we have a large, positive effect on employment of the minimum wage,
but it is statistically significant.
That right there, this number is the main finding of the Card and Krueger 1994 paper.
Now this paper is extremely famous because this isn't what people usually expected the
minimum wage to do.
Most people would have thought that the minimum wage would lower employment, would mean that
it'd be harder for people to get jobs, and this finding is exactly the opposite.
So, as you might expect there's still a huge debate about this policy, and what's the best
thing or what's the actual effects of these policies, and this paper is one of the things
that kickstarted an enormous literature on this topic.
So if you're interested in this policy and this topic, definitely I encourage you to
read more.
That's the basic finding they use just in application of difference-in-differences.
[MUSIC].