Half of the 2021 Nobel Prizes in Economic Science went to David Card, of the University of California Berkeley (who got his traditionally assigned Nobel laureate parking space even thought he rides a bike to work)…
“for his empirical contributions to labour economics”
The other half went jointly to Joshua D. Angrist of the Massachusetts Institute of Technology and Guido W. Imbens of Stanford University…
“for their methodological contributions to the analysis of causal relationships”
They are all strong proponents of what are called “natural experiments” which seems to be a way of saying they can use situations that occur in real life to gather real data to compare policy A against policy B.
David Card: Does raising the minimum wage cost jobs?
The neoclassical intuition / thought experiment
In neoclassical economics, the thought experiment goes like this:
- In any market, the demand for something is influenced by it’s price
- All things being equal, when something costs more, we in aggregate buy less of it.
- If the minimum wage goes up, employers will of necessity higher fewer people.
The empirical data
In 1992, the US state of New Jersey increased it’s minimum wage to the highest in the nations, while the neighboring state of Pennsylvania did not.
Since fast food outlets employ many minimum wage workers, on both sides of the New Jersey – Pennsylvania border, David Card and Alan Krueger surveyed around 400 fast foot outlets that were near each other, but on different sides of the border.
They were testing the neoclassical idea that increasing the minimum wage would reduce the number of jobs.
This experiment provided the answer in a paper that was published in 1994: No, it doesn’t.
Support for the idea that increasing the minimum wage spread to other economists at the International Monetary Fund (IMF) and The Organization for Economic Co-operation and Development (OECD) who credit the paper David Card and Alan Krueger published in 1994 with influencing their understanding of this issue.
In 2020 (24 years after their study was published) regions within the USA started to pass laws increasing the minimum wage to $15.00 and hour, vs the current federal minimum wage of $7.25 an hour.
Joshua Angrist and Guido Imbens: Empirical data matters
This one is much more interesting to me, as the focus of their work was to establish new methods of conducting “natural experiments” in economics. Methods and tools for determining cause and effect within the study of economics.
Their very focus is on how to glean insights by collecting and analyzing data through observations of the real world.
Why are economic experiments hard?
You might think this should be easy, but in economics a researcher can’t create a few test groups and a control group the way a medical or a biological or a chemistry researcher does.
Economic researchers are limited to what is actually happening in the real world based on real policies being implemented by real law makers and real policy makers.
And how can they be made easier?
So they need methods tools which allow them to structure data collection, shift through data, and focus on “signal” while eliminating “noise”.
The work that Joshua Angrist and Guido Imbens received their award for is precisely focused on how to do this.
Economists became better able to determine that when one thing correlates to another, did one cause the other? Visa versa? Or were both caused by something else?
According to Diane Coyle, an economist at the University of Cambridge:
“Causality is the holy grail in economics”.
These are people who have driven forward the ‘applied turn’ in economics through their work on methods for detecting causal relationships.”