Difference-in-differences: The Silver Crash of 1893 and Population Characteristics

1. Difference-in-differences: The Silver Crash of 1893 and Population Characteristics Rey Hernández-Julián Department of Economics Metropolitan State College of Denver

2. Correlation ≠ Causation • Sometimes this is obvious: • Birds flying south makes the weather to get colder • The lack of pirates led to global warming • Sometimes not so obvious: • Does reducing class size cause an improvement in student test scores?

3. How can we ever know? • Natural sciences serve as a model • How does exposure to a certain element affect the growth rate of a cell? • How do you test to see if a medical treatment has a positive effect on the patient’s outcomes? • Randomized Controlled Experiment

4. Not so simple • It’s one thing to experiment with molecules, cells, animals, and even people in the medical sciences… • It’s another thing to experiment with an entire economy! • What is the effect of a recession on local population? • But It happens all the time! • Government policy • Randomness of reality • We call these natural experiments. • Our job: find a good one

5. The Silver Crash of 1893 • Sherman Silver Purchase Act repealed. • Price of Silver fell from a high of $1.50/oz to $0.62/oz. • Colorado was a main Silver producer • 60% of nation’s total! • Some counties produced silver at higher rate than others • Natural experiment: recession randomly assigned to some counties and not to others!

6. Research Questions • Q1: How does the fall in the price of the silver affect a county’s population growth from 1890-1900? • Q2: How does the fall in the price of silver affect a county’s male/female ratio between 1890-1900?

7. Experimental Design • Find two counties, one produces a lot of silver, one does not. • The one that is silver intensive is the treatment town; it receives the treatment (local recession). • The one that doesn’t is the control town; it does not receive the treatment. • Assume that treatment is randomly assigned.

9. Census1890 and 1900 • Douglas County • low level of silver production • Rhyolite • Ouray County • lots of mining, lots of silver • local economy seriously and directly impacted

10. Difference-in-differences

11. Q1: Population

12. Q1: Population

13. Q2: Percent Male

14. Underlying Assumptions • If not for the Sliver Crash, the two towns are expected to have similar growth patterns. • The kind of people who settle in places like Ouray and Douglas have similar expectations and would respond similarly to a recession. • These towns are representative of the pattern. • This assumption can be eliminated by having a larger sample.

15. Conclusions • Difference-in-differences uses data from a natural experiment to estimate the magnitude of a casual relationship. • Students can learn how to collect, organize, and analyze data even if the natural experiment isn’t perfect. • Students gain critical thinking skills from analyzing the assumptions of natural experiments.