1. Economist David Card in his 1992 paper "Do Minimum Wages Reduce Employment? A Case Study of California, 1987-1989" published in Industrial and Labor Relations Review studied the effects of the 1988 minimum wage increase in California from $3.35 an hour to $4.25 an hour. He compared a sample of Californian teenagers from the Current Population Survey to a comparison group of teenagers from states without a change in the minimum wage between 1987 and 1989. a. Conventional economic theory would suggest that Card would find that the wages of employed California teenagers would go up faster than the wages of the comparison group's teenagers, but the minimum wage increase would cause teenage employment to decline in California relative to the comparison group. Did Card find results that match conventional economic theory according to the table below? Please briefly explain why or why not. (10 points) Wages and Employment of Teenagers: California vs. Comparison Group California Teens Comparison Group Teens 1987 1989 1987 1989 Mean Wage ($/br) $4.59 $5.40 $4.21 $4.55 Percentage Employed 42.0% 47.4% 46.4% 46.1% b. Figure 2 from Card's working paper plots two histograms together. Bars in stripes show the distribution of low wage (paid less than $6.10/br) workers' wages in 1987. Bars in solid black show the distribution of low wage workers' wages in 1989. The height the bar indicates the fraction of low workers paid a wage within $0.10 of the wage labeled on the horizontal axis in that year. For example, the striped bar above 5.0 on the horizontal axis indicates that a fraction 0.17 (or 17%) of low wage workers were paid between $4.90/hr and $5.10/hr in 1987. Figure 2 Lower Tail of Wage Distribution California: 1987 and 1989 (Wage less than $6.10 per hour) 0.25 Relative Frequency 0.2- 0.15- 0.1- 0.05 3.0 3.4 3.8 42 4.6 5.0 5.4 5.8 Hourly Wage (Current Dollars/Hour) C. EZZ 1987 Distribution 1989 Distribution Approximately what percentage of low wage workers were paid the $3.35/br minimum wage in 1987? Approximately what percentage of low wage workers were paid the $4.25/br minimum wage in 19897 (8 points)d. One predicted effect of the minimum wage increase would be an increase in prices in the most affected industries. David Card surveyed the price of McDonald's Quarter Pounder during and after the minimum wage changes in Californian and other cities to track the prices of fast food. Please compute the mean price of a Quarter Pounder in the 2d quarter of 1987 in California as a weighted mean using the table below. Please use the cities' population in 1990 as the weight in your calculations. Please report the average price to two decimal places (nearest cent). (8 points) Price of Mcdonald's Quarter Pounder in California Cities in the 2d Quarter of 1987 Price Population (1990) Bakersfield $ 154 185.405 Fresno $ 149 357,662 Riverside $ 140 231,053 Sacramento $ 143 398,256 San Diego $ 152 1.118,000 e. Why might the simple (unweighted) mean of Quarter Pounder prices computed from the above table might not be the best way to compute the mean price that Californians pay? (7 points) Figure 3 from Card's paper presents a scatterplot of teenage employment in 1987 versus teenage employment in 1989 across US states: 70- 65- GO- Teenage Employment Rate in 1989 OO 54 50- California 45 O 45 50 55 65 70 Teenage Employment Rate in 1987 * States with Higher Minimum Wage in 1989 O Other Stairs Figure J. Teenage Employment-Population Rates in the 50 States and the District of Columbia: 1989 Rates Plotted Against 1987 Rates. Suppose that you ran the following regression: Employment Rate in 1989, = 1 + 82 * Employment Rate in 1987, + er Do you think you will have a serial (aka, auto) correlation problem with respect to the states that have higher minimum wages in 1989 compared to those that did not? (7 points)
