Fifteen years ago, the town of Easton decided to increase its annual spending on education so that its high school graduates would be able to earn higher wages. Now Easton has asked you to evaluate the effectiveness of the spending increase. Their data show that before the spending increase, the average salary of recent high school graduated was $25,000 and that now the average salary has risen to $28,500. Fortunately for your analysis a neighboring community did not change its annual spending on education. In the other town 15 years ago high school graduates earned an average of $22,500, and now the average is $23,750. a) Use a differences-in-differences estimator to determine whether Easton’s spending increase potentially caused the wages of high school graduates to rise. b) What underlying assumption do you have to make in order for your estimate to be valid? What might cause that underlying assumption to not be valid?
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7) Fifteen years ago, the town of Easton decided to increase its annual spending on education so that its high school graduates would be able to earn higher wages. Now Easton has asked you to evaluate the effectiveness of the spending increase. Their data show that before the spending increase, the average salary of recent high school graduated was $25,000 and that now the average salary has risen to $28,500. Fortunately for your analysis a neighboring community did not change its annual spending on education. In the other town 15 years ago high school graduates earned an average of $22,500, and now the average is $23,750.
a) Use a differences-in-differences estimator to determine whether Easton’s spending increase potentially caused the wages of high school graduates to rise.
b) What underlying assumption do you have to make in order for your estimate to be valid? What might cause that underlying assumption to not be valid?
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