(Solved): Policymakers have been interested in the effect of minimum wage on the employment rate. Propose two ...

Expert Answer

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Difference-in-Differences (DiD)
The Difference-in-Differences (DiD) method is an effective way to estimate the causal effect of a policy on an outcome. In this method, we compare the changes in employment rate between two different groups, pre and post the implementation of the policy. The two groups we would focus on are the treatment group (where minimum wage was increased) and the control group (where minimum wage remained the same). The change in the employment rate in the treatment (minimum wage increase) group is then compared to the change in the employment rate in the control group. If the change in the treatment group is larger than the change in the control group, then this suggests that the minimum wage increase had a positive effect on the employment rate.

Regression Discontinuity Design (RDD)
The Regression Discontinuity Design (RDD) is another effective way to estimate the causal effect of a policy on an outcome. In this method, we examine the relationship between the policy and the outcome by looking at the changes in the outcome across a predetermined threshold. For example, we can compare the employment rate of workers who just meet the minimum wage (the treatment group) to those just below the minimum wage (the control group). If we find that the employment rate of the treatment group is higher than that of the control group, then this suggests that the minimum wage increase had a positive effect on the employment rate.