a) According to the neoclassical view of labor markets, what is the likely effect of an increase in the federal minimum wage on the employment of low-wage workers? Describe and show graphically. What happens to the aggregate earnings of low-wage workers if the elasticity of the labor demand curve is greater than one in absolute value?
b) Describe briefly two empirical studies covered in class that examine the effects of minimum wage changes on the employment of low-wage workers. In your description, include the empirical methods (i.e., treatment and control groups) and the main findings of each study. Is this evidence consistent with the predictions of the neoclassical labor demand theory?
c) Suppose the governor of Ohio is considering raising the minimum wage and wants to forecast the effect of this increase on the employment of restaurant workers. To predict the employment effects, the governor’s analysts have applied a “difference-in-differences” approach utilizing the fact that Ohio increased the minimum wage from $7.00 to $7.30 on January 1, 2009, while Pennsylvania’s minimum wage did not change on January 1, 2009. From the estimation of changes in the employment of low-wage workers in Ohio from April 2008 to April 2009 relative to the changes in Pennsylvania during the same time period, they concluded that the minimum wage increase will cause a reduction in the employment of low-wage workers in Ohio. Explain under what conditions this difference-in-differences approach can be used to estimate the causal effect of the minimum wage increase on employment?