A wage-bill subsidy is a payment to an employer to encouage the employer to increase employment. Usually wage-bill subsidies are “targeted” toward certain groups of workers, like former welfare recipients or disadvantaged workers (high-school dropouts). Sarah Hamersma (Journal of Policy Analysis and Management 2008) examined the effect of the Work Opportunity Tax Credit (WOTC) and the Welfare-to-Work Tax Credit (WtW) on employment of former welfare recipients and high-school dropouts in Wisconsin. To do this, she compared the employment rate of eligible individuals (the treatment group) with the employment rates of “almost-eligible” individuals (the control group).

During the two years before the program, 75.1% of the treatment group was employed at some time, and 76.8% of the control group was employed at some time. During the two years after the program, 65.1% of the treatment group was employed at some time, and 66.6% of the control group was employed at some time.

1. If we assume that, without the WOTC and WtW tax credit, the employment rate of the treatment group would have followed the same trend as controls, what would have happened to the employment rate of the treatment group following implementation of the tax credits? That is, what would the employment rate of eligible workers have been in the absence of the tax credits?

2. Based on your answer to (a), what is the difference-in-differences estimate of the the effect of the tax credits on the employment rate of eligible workers? Show your work and explain your answer.

3. Is your answer in (b) what you expected? Why or why not?