On April 1, 1992 New Jersey increased the minimum wage from $4.25 to $5.05. Card and Krueger (1994) collected data on employment in fast food restaurants in New Jersey (NJ) in February 1992 (i.e., before the increase in the minimum wage) and again in November 1992 (i.e., 7 months after the increase in the minimum wage). They also collected the same type of data for fast food restaurants in Pennsylvania (PA), a neighbouring state where the minimum wage remained unchanged. a) You are asked to estimate the effect of the policy change on employment: i) Carefully explain how you can use this type of data to obtain a difference-in-difference estimate for the effect of the increase in the minimum wage on employment. ii) Under which assumptions does the difference-in-difference estimator identify the causal effect of the increase in the minimum wage on employment? [15 marks] b) The following table, adapted from Card and Krueger, 1994 (Table 3), reports average full-time equivalent (FTE) employment at restaurants in Pennsylvania and New Jersey before (February 1992) and after (November 1992) the increase in the minimum wage in New Jersey. Table 1: Average employment across the two states PA NJ Difference, NJ-PA FTE employment before (Feb. 1992) 23.33 20.44 -2.89 FTE employment after (Nov. 1992) 21.17 21.03 -0.14 Change in mean FTE -2.16 0.59 2.76 i) Carefully interpret the empirical results. [10 marks] ii) Are the findings in line with the theory of competitive labour markets? [5 marks] Continues on next page c) Suppose that the increase in the minimum wage in New Jersey was already announced in July 1991, but came into effect only in April 1992. Why might this cause a problem for the difference-in-difference estimator, as implemented in b)? [10 marks]