4. (8 points) An economist seeks to calculate a differences-in-differences estim

Question

4. (8 points) An economist seeks to calculate a differences-in-differences estimate for the effect of a training program on earnings. Workers are randomly assigned to a treatment group and a control group. Workers in the treatment group receive training, but workers in the control group do not. The training progra takes place in 2005. The average wage of workers in the control group is 100 in 2004 and 200 in 2006. The average wage of workers in the treatment group is 110 in 2004 and 290 in 2006.

Explanation / Answer

(a)

Average wage of control group in 2004 = 100

Average wage of control group in 2006 = 200

Calculate the increase in average wage for the control group between 2004 and 2006 -

Increase = Average wage of control group in 2006 - Average wage of control group in 2004

Increase = 200 - 100 = 100

The increase in average wage for the control group between 2004 and 2006 is 100.

Average wage of treatment group in 2004 = 110

Average wage of treatment group in 2006 = 290

Calculate the increase in average wage for the treatment group between 2004 and 2006 -

Increase = Average wage of treatment group in 2006 - Average wage of treatment group in 2004

Increase = 290 - 110 = 180

The increase in average wage for the treatment group between 2004 and 2006 is 180.

(b)

Calculate the increase in the average wage for the treatment group minus the increase in the average wage for the control group -

Value = Increase in the average wage for the treatment group - Increase in the average wage for the control group

Value = 180 - 100 = 80

Thus,

The increase in the average wage for the treatment group minus the increase in the average wage for the control group is 80.

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