During the period 1994-2001, the minimum wage in Western Australia increased multiple times. In the same period the minimum wage in all other Australian states remained constant. Suppose that you are interested in estimating the effects of the minimum wage on employment. Knowing about the influential study by Card and Krueger (1994) you decide to use the minimum wage changes in Western Australia as a natural experiment for a differences-in-differences estimation. Thus, you collect information on the employment-to-population-ratio in Western Australia and in the other states (Rest of Australia). This information is summarized in the table below.

a. For each minimum wage increase, calculate the difference-in-difference estimate of the effect of the minimum wage on employment (that is, fill out with numbers the blank spaces _ in the table).

b. Show how to obtain the difference in difference estimator on a graph having employment on the y-axis and time around the minimum wage change on the x-axis. Show a separate graph for each minimum wage increase.

c. Did the increases of the minimum wage in Western Australia appear to have increased or decreased employment?

d. What is the main threat to the difference-in-difference estimation strategy in this setting?

e. How would you estimate the difference in difference effects of the minimum wage using a regression? Write down the equation of the regression that you would estimate, making sure to explain each term in this equation and how the regression allows to measure the effects of the minimum wage on employment. For this question please refer to the 1995 wage rise only.

Western Australia Difference in Difference Rest of Australia 0.555 0.632 0.452 0.556 0.524 0.451 0.498 0.454 September 1995 wage rise Before After Difference December 1998 wage rise Before After Difference March 2000 wage rise Before After Difference March 2001 wage rise Before After Difference 0.635 0.606 0.610 0.592 0.560 0.507 0.487 0.5 Western Australia Difference in Difference Rest of Australia 0.555 0.632 0.452 0.556 0.524 0.451 0.498 0.454 September 1995 wage rise Before After Difference December 1998 wage rise Before After Difference March 2000 wage rise Before After Difference March 2001 wage rise Before After Difference 0.635 0.606 0.610 0.592 0.560 0.507 0.487 0.5