Explained: Top prize for labour economics

What is the News?

The Royal Swedish Academy of Sciences has awarded the Nobel Prize in Economics to three US-based economists: David Card, Joshua D. Angrist and Guido W. Imbens. The prize has been awarded – with one half to Card, and the other half jointly to Angrist and Imbens – for their work on drawing conclusions from natural experiments.

What are Natural Experiments?

​​Natural experiments are real-life situations that economists study and analyse to determine cause-and-effect relationships.

David Card’s work on Wages & Jobs

David Card studied the relationship between the minimum wage and employment in the early 1990s.

He compared the labour market of US states of New Jersey, where the minimum wage had been increased and Pennsylvania, where it had not.

The research showed that the minimum wage increase had no downward effect on the number of employees.

That finding went against the prevailing theory at the time, which assumed that an increase in the minimum wage would destroy jobs as it would make it more expensive for companies to do business.

Angrist and Imbens work on education and pay
Sveriges Riksbank Prize
Source: Indian Express

Angrist and Imbens won the other half of the award for their methodological contributions to the analysis of causal relationships.

​​For example, extending compulsory education by a year for one group of students (but not another) may or may not affect everyone in the groups in the same way. This is because some students would have kept studying anyway, and for them, the value of education is often not representative of the entire group. So, is it even possible to draw any conclusions about the effect of an extra year in school?

In the mid-1990s, the duo solved this methodological problem, demonstrating how precise conclusions about cause and effect can be drawn from natural experiments.

Read – About Nobel Prizes 

Source: This post is based on the following articles:

  • “Explained: Top prize for labour economics” published in ‘Indian Express’ on 10th October 2021. 
  • “Nobel’s good card: 2021 economics prize acknowledges data’s role in understanding the real world” published in ‘TOI’ on 10th October 2021. 
  • “Three share Economics Nobel for research on natural experiment to study cause and effect” published in ‘The Hindu’ on 10th October 2021. 
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