JOIN USNatural experiments won Nobel for 3
When the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economics for 2021, officially called the Sveriges Riksbank Prize in Economic Sciences, to three economists from the United States — David Card, Joshua Angrist and Guido Imbens, the response from the economist fraternity was bittersweet. This was since much of the work done by David Card was co-written by the late Alan Kreuger.
Kreuger belonged to the new breed of economists who use hard data to tackle many of the problems of society. He was arguably one of the greatest labour economists and taught at the University of Princeton till he took his own life in 2019. Unfortunately, the Nobel prize is not given posthumously. His seminal work with David Card in 1992 on the effects of minimum wages on employment changed the way economics was perceived - from a theory or ideology-driven subject to an evidence-based one.
Alan Kreuger and David Card used empirical research extensively just like experiments or clinical trials are done in the medical field on a target group before drawing conclusions. They collected data from companies like Burger King, Wendy’s & Roy Rogers in the fast-food industry in New Jersey and Pennsylvania and presented a paper titled “Minimum wages & employment: A case study of the Fast-Food Industry in New Jersey & Pennsylvania”. The findings were pathbreaking. They did not find any adverse impact on employment in New Jersey and Pennsylvania before and after New Jersey raised its minimum wage from $4.25 to $5.05. What their research did was to challenge the orthodoxy or the conventional wisdom that had dominated the field of economics for decades. Till then, economists had assumed that raising the minimum wages would increase unemployment.
Cut to the Nobel Prize. The Royal Swedish Academy of Sciences awarded one half of the prize to David Card from the University of California, Berkeley for his empirical contributions to labour economics and the other half jointly to Joshua D Angrist from the Massachusetts Institute of Technology and Guido W Imbens from Stanford University for their methodological contributions to the analysis of causal relationships. Due to the pioneering work and the empirical studies of all the three Nobel laureates, we have a better understanding of the impact of minimum wage, immigration and education on labour markets today. Their studies have also provided us with insights on the following questions: How does immigration affect wages and employment in an economy? How do more years of education help in increasing someone’s future income? What is the impact of raising minimum wages on employment?
Labour market
To understand the impact of immigration on the labour market and employment a major event in 1980 provided a golden opportunity for David Card to use natural experiments. In April of that year, Cuban leader Fidel Castro surprisingly gave Cubans an option to leave the country. In the following few months, 1,25,000 Cubans migrated to the US. Many of them settled in Miami, which increased the labour force of the city by nearly 7%. Card compared the wage and employment trends in Miami with the level of wages and employment in four different cities to examine how this huge influx of workers affected the labour market in Miami. The findings were startling. Card found no negative effects for Miami residents with lower education levels despite the huge increase in labour supply. Compared to other cities which did not experience the influx of immigrants, wages did not decrease, and unemployment did not increase in Miami. This influx of Cuban refugees is shown in the movie Scarface, a 1983 Hollywood thriller.
Israel-born Joshua Angrist studied veterans who had joined the US army during the Vietnam war. He wanted to find out if there was any correlation between years of education and future income. Angrist was trying to find out whether joining the army at a young age robbed the teens of education and affected their future earnings. Back then, teens with fewer opportunities during their young age were more likely to join the army.
These individuals would have gone to earn less in any other job even if they didn’t join the army. And this is what the economists of the day inferred without doing any randomisation or a natural experiment. The war provided a golden opportunity to Angrist to find a causal relationship between education and income. Angrist found as per records, long after their service in Vietnam was ended, the earnings of white veterans were about 15% less than the earnings of comparable nonveterans. Angrist and Imbens demonstrated how precise conclusions about cause and effect can be drawn from natural experiments. We can now understand why parents everywhere keep telling their children to work hard and focus on their studies since higher education is a passport to better jobs and better jobs would mean more earnings.
(The writer is a CFA and a former banker. He currently teaches at Manipal Academy of BFSI, Bengaluru)
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