Fifteen years ago, the town of Easton decided to increase its annual spending on education so that its high school graduates would be able to earn higher wages. Now Easton has asked you to evaluate the effectiveness of the spending increase. Their data show that before the spending increase, the average annual salary of recent high school graduates was $25,000 and that now that average salary has risen to $28,500. Fortunately for your analysis, a neighboring community (Allentown) did not change its annual spending on education. Fifteen years ago, recent Allentown high school graduates earned an average of $22,500, and now that average is $23,750.

a. Use a difference-in-differences estimator to determine whether Easton’s spending increase caused the wages of their high school graduates to increase.

b. What underlying assumption do you have to make in order for your estimate to be valid? What might cause your underlying assumption to be invalid?

c. This data set contains only two observations. Even if the underlying assumption in part b is met, how much confidence can you have in conclusions based on two observations?