ps4_sol - Department of Economics University of California...

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Department of Economics Fall 2007 University of California Prof. Woroch Economics 140: PS4 ANSWER SHEET I. SHORT QUESTIONS : Answer to each of the following questions. They do not require any computation. 1 Until recently, most empirical studies in labor economics found a small but significant negative relationship between minimum wages and teenage employment. Two labor economists challenged this perceived wisdom with a 1992 publication that compared employment changes of fast-food restaurants in Texas before and after a federal minimum wage increase. They did not find a negative effect of the increase on employment. a) List and explain the various threats to “external validity” you would confront when attempting to generalize the results of this study to (1) other employment to settings, (2) other time periods, and (3) other populations as compared to fast-food industry workers in Texas in the early 1990s. Answer: (1) Other industries: Generalizing from fast-food restaurants to other sectors is problematic, as the industry structure and the typical employee may be very different, and hence the response to a change in the minimum wage. In an industry with firms with monopsony power, a change in the minimum wage may have little effect on employment, while an industry with a competitive labor market may respond to a change with a decrease in employment. Other places: Using data from Texas to generalize to other US states would be of concern if you believed that the Texas fast-food restaurants are different from those elsewhere, say in terms of monopsony power or the type of teenager they attract. Application to other countries may not be valid because of cultura l differences may be greater than regional differences within the United States. (2) Other time periods: The real level of the minimum level may have been different in the early 1990s than in other time periods, and a minimum wage increase may have different effects depending on the minimum wage’s real value. (3) Other populations: Generalizing from teenagers to older workers is not automatic by any means. An increase in the minimum wage may attract some teenagers to leave school for employment, but that is unlikely to be the case for adults. b) Explain how you would generate external validity in this field of study. Answer: Expanding this particular study beyond Texas/early 1990s/fast-food industry would be a first step. Alternatively can run similar estimation of the effect of minimum wages on employment using specific data from other states, countries, time periods, and/or industries. Of course, all of these recommendations require collecting additional data. 2 An assignment in your macroeconomics course asks you to estimate a demand for money function. You consider two specifications: (i) 01 2 mG D P R u β ββ =+ × + (ii) u e R GDP e m × × × = 2 1 0
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where m = (Money Supply/Price Index), GDP = (Gross Domestic Product/Price Index), and R = (nominal interest rate). You collect quarterly data on all variables from the Federal Reserve Bank of St. Louis data bank (“FRED”), which lists the money supply and GDP in billions of dollars, nominal
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This note was uploaded on 10/21/2008 for the course ECON 140 taught by Professor Duncan during the Fall '08 term at Berkeley.

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ps4_sol - Department of Economics University of California...

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