Establishing causation: minimum wage and employment

Question

You want the causal effect of raising the minimum wage on employment. You cannot randomize which places raise it, but only some states enacted an increase while neighbors did not.

Describe how you would estimate the causal effect from this observational setting. Name at least two identification strategies and the key assumption each relies on.

Accepted Answer

The obstacle is confounding: states that raise the minimum wage differ from those that do not (politics, local economy), so a raw comparison conflates the policy with those differences. The staggered rollout is a natural experiment you can exploit. 1. Difference-in-differences. Compare employment in states that raised the wage (treatment) versus states that did not (control), before versus after, and take the difference of the two changes. That differencing cancels fixed differences between states and common national shocks. Key assumption: parallel trends, the treated and control states woul…

Establishing causation: minimum wage and employment

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