Question

In 1998, the City of Boston, Massachusetts passed a minimum wage ordinance. Broadly speaking, the ordinance covered firms that had contracts with the City. However, for a variety of reasons, some firms were exempt from having to pay the minimum wage, and thus were unaffected by the ordinance. Recently, a researcher named Mark Brenner evaluate the effect of Boston’s minimum wage ordinance on employment levels by gathering data on firms that have contracts with the City of Boston. He found that prior to the passage of the ordinance in 1998 the average number of FTEs (full-time equivalent employees) was 165.6 in “affected” firms and 152.4 in “unaffected” firms. In 2001, he found that the average number of FTEs was 187.7 in “affected firms” and 174.8 in “unaffected” firms.

1. Calculate the difference-in-difference estimate of the effect of Boston’s minimum wage ordinance on employment levels in city contractors.

2. Did the introduction of the minimum wage ordinance appear to increase or decrease employment? Is the change large or small?

3. Give one possible reason why the DiD design might fail to give an unbiased estimate of the employment effects of the minimum wage ordinance in this setting.

Answer 1

1Calculate the difference-in-difference estimate of the effect of Boston’s minimum wage ordinance on employment levels in city contractors

Answer difference in the estimate

prior to the passage of ordinance  

no. of full time quivalent employees in affected firms = 165.6

no. of full time quivalent employees in non-affected firms =152.4

After the passage of ordinance in 2002

no. of full time quivalent employees in affected firms =  187.7

no. of full time quivalent employees in non-affected firms =174.8

difference in the estimate or change in employement level  

difference in no. of full time quivalent employees in affected firms = 187.7 - 165.6 = 22.1

difference in no. of full time quivalent employees in non-affected firms = 174.8 - 152.4 =22.4

change in the employement level between affected or unaffected = 22.4-22.1 = 0.3

2 Did the introduction of the minimum wage ordinance appear to increase or decrease employment? Is the change large or small?

Answer - The introduction of minimum wage ordinance appears to decrease the employement in affected firms in comparison with the unaffected firms as we can see in the calculation above .The change is small and is 0.3

3 Give one possible reason why the DiD design might fail to give an unbiased estimate of the employment effects of the minimum wage ordinance in this setting.

Answer The design might fail to give an unbaised estimate of the employement effect of minimum wage because it is not being imposed to the firm who are exempted .This make a change in the labor demand market and it causes the error in the estimation of the employement affect by the ordinance setting .Also , in this situation the consider data is for 2 years after the post ordinace passage and it has to take the data for 5 years to properly calculate the effect of employement level to avoid biqasing the results and affects .

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