Two authors published a study in 1992 of the effect of minimum wages on teenage employment using a U.S.

state panel. The paper used annual observations for the years 1977

-

1989 and included all 50 states plus the

District of Columbia. The estimated equation is of the following type

(

E

it

)

=

0

+

1

(

M

it

/

W

it

)

+

2

D

2

i

+

...

+

n

D

51

i

+

2

B

2

t

+

...

+

T

B

13

t

+

u

it

,

where

E

is the employment to population ratio of teenagers,

M

is the nominal minimum wage, and

W

is

average wage in the state. In addition, other explanatory variables, such as the prime

-

age male unemployment

rate, and the teenage population share were included.

(a) Briefly discuss the advantage of using panel data in this situation rather than pure cross sections or time

series.

(b) Estimating the model by OLS but including only time fixed effects results in the following output

E

^

it

=

^

0

-

0.33

(

M

it

/

W

it

)

+

0.35(

SHY

it

) - 1.53

uram

it

;

R

2

=

0.20

(0.08)

(0.28)

(0.13)

where

SHY

is the proportion of teenagers in the population, and

uram

is the prime

-

age male unemployment

rate. Coefficients for the time fixed effects are not reported. Numbers in parenthesis are homoskedasticity

-

only

standard errors.

Comment on the above results. Are the coefficients statistically significant? Since these are level regressions,

how would you calculate elasticities?

(c) Adding state fixed effects changed the above equation as follows:

E

^

it

=

^

0

+

0.07

(

M

it

/

W

it

) - 0.19

(

SHY

it

) - 0.54

uram

it

;

R

2

=

0.69