The impact of a change in the minimum wage on employment is a long-standing debate among labour economists. For their influential paper, US economists David Card and Alan Krueger collected data on fast-food restaurants in New Jersey (NJ) and Pennsylvania (PA) during March (the first interview wave) and November (the second interview wave) of 1992. On April 1, 1992, New Jersey raised its minimum wage from $4.25 to $5.05. The minimum wage in Pennsylvania remained at the federal level of $4.25.

1. The difference in average employment (in full-time equivalents) between the second and first interview waves was 0.29 for NJ and -2.01 for PA. Calculate the difference between NJ and PA of these time differences. Interpret your difference-in-differences estimate. Under what conditions does this difference-in-differences estimator provide a valid estimate of the employment effect of the minimum wage increase?

1. The difference in the average starting wages between the second and first interview waves was $0.47 for NJ and $-0.03 for PA. Calculate the difference between NJ and PA of these time differences. Has your difference-in-differences estimate the sign and order of magnitude that you expected?

1. An alternative to comparing NJ and PA restaurants is comparing restaurants within NJ who have high and low wages before the minimum wage increase. For restaurants in NJ paying starting wages less than $5.00 in March 1992, the average employment increase between the second and first interview waves was 1.05. For restaurants in NJ paying starting wages of $5.00 or more in March 1992, the change in average employment between the second and first interview waves was -2.25. Interpret your difference-in-differences estimate. Under what conditions does the difference-in-differences estimator now provide a valid estimate of the employment effect of the minimum wage increase?