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 program 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. (a) What is the increase in the average wage for the control group between 2004 and 2006? What is the increase in the average wage for the treatment group between 2004 and 2006? (b) What is the increase in the average wage for the treatment group minus the increase in the average wage for the control group?

Explanation / Answer

Average age of workers in the control group in 2004 (w1) = 100
Average age of workers in the control group in 2006 (w2) = 200

Average age of workers in the treatment group in 2004 (w3) = 110
Average age of workers in the treatment group in 2006 (w4) = 290

(a) Increase in the average wage for the control group between 2004 and 2006 = [(w2 - w1)/w1]*100
= [(200 - 100)/100]*100 = 100%

Increase in the average wage for the treatment group between 2004 and 2006 = [(w2 - w1)/w1]*100
= [(290 - 110)/110]*100 = (180/110)*100 = 163.64%

(b) Increase in the average wage for the treatment group minus increase in the average wage for the control group = 163.64% - 100% = 63.64%

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