This year’s Nobel prize in economics was awarded to the labor economists and econometricians David Card, Joshua Angrist and Guido Imbens. Over the last decades, the laureates’ research has had a far-reaching impact on the way empirical research in economics is conducted.
David Card popularized the use of so-called natural experiments, which focus on naturally occurring changes in the economy that resemble an experimental setup. This allows to better study cause and effect of economic mechanisms instead of merely estimating statistical correlations.
In a 1994 article written together with his colleague Alan Krueger, David Card analyzed how changes in minimum wages affect employment levels in the United States. This paper has become a landmark study in labor economics because it was among the first to provide credible empirical evidence on the effects of wage regulations. The idea of Card and Krueger was very simple: they examined a raise in minimum wages in a specific US state and constructed comparison groups to figure out which employment changes were driven by the policy change. As one comparison group, they used a neighboring state, which did not raise the minimum wage. Another group consisted of employers that already paid high wages before the raise and were thus not affected by it. Both comparisons showed that the change increased rather than decreased employment levels. The findings challenged the common belief among economists that minimum wages cause unemployment because the marginal workers would become too expensive in a competitive labor market.
In another well-known study on the effects of migration, Card examined a large and sudden inflow of Cuban migrants in Miami in 1980 as a natural experiment. To get an estimate on the impact of the migration wave, he used US cities with similar labor market characteristics as comparison group. The analysis showed very little effects on wages and unemployment, a result that is again at odds with the predictions of standard economic theory.
Even though both studies had to rely on rather imprecise data by today’s standards, the innovative approach and careful analysis make them to this day two of the most relevant studies in labor economics. While the labor market is often too complex to infer fundamental laws based on the findings of single studies, Card’s research stressed that more credible empirical evidence is needed to prove predictions derived from economic theory.
Among other relevant contributions to the profession, Joshua Angrist and Guido Imbens have developed a framework that allows to better understand how estimates of causal effects should be interpreted. Because individuals are different, one should not expect that economic effects are the same for everybody. This complexity poses several challenges for empirical analysis. A specific policy, for instance, can have a very different impact on different groups of workers in the labor market. When analyzing natural experiments, it is often only possible to estimate effects for a specific subgroup in the labor market. This is what Angrist and Imbens label local effects. An important implication is that studies on the same topic which exploit different natural experiments can lead to very different findings.
Labor economics, which is nowadays one of the biggest field within the economic sciences, has been profoundly shaped by the work of the Nobel laureates. Even though many of the ideas originated from the study of the labor market, the techniques and methods are now also widely applied in other areas of empirical research. Moreover, the research has helped to bridge the gap between academic researchers and decision makers in the economy by providing credible evidence about the causal effects of policy changes.
Text by Lennart Ziegler, Assistant Professor of Economics at the Economics department of the University of Vienna. In Spring 2016, he was a visiting PhD-student at David Card’s Center for Labor Economics at the University of California, Berkeley.
Read more:
https://www.nobelprize.org/prizes/economic-sciences/
