How Nobel Prize winner changed experts’ minds on wages, immigrants and work

A US-based economist has won the Nobel prize in economics for pioneering research that transformed widely held ideas about the labour force, showing how an increase in the minimum wage doesn’t hinder hiring and immigrants do not lower pay for native-born workers.

Two others shared the award for creating a way to study these types of societal issues.

Canadian-born David Card of the University of California, Berkeley, was awarded half of the prize for his research on how the minimum wage, immigration and education affect the labor market.

2021 Nobel Prize in economics winner David Card’s wife, Cynthia Gessele, snapped this photo of him speaking on the phone right after he had heard the news. (The Nobel Prize)

The other half was shared by Joshua Angrist from the Massachusetts Institute of Technology and Dutch-born Guido Imbens from Stanford University for their framework for studying issues that can’t rely on traditional scientific methods.

The Royal Swedish Academy of Sciences said the three had “completely reshaped empirical work in the economic sciences”.

Together, they helped rapidly expand the use of “natural experiments,” or studies based on the observation of real-world data.

Such research made economics more applicable to everyday life, provided policymakers with actual evidence on the outcomes of policies, and in time spawned a more popular approach to economics epitomized by the blockbuster bestseller Freakonomics, by Stephen Dubner and Steven Levitt.

In a study published in 1993, Card looked at what happened to jobs at fast-food restaurants Burger King, KFC, Wendy’s and Roy Rogers when New Jersey raised its minimum wage from US$4.25 to US$5.05, using restaurants in bordering eastern Pennsylvania as the control — or comparison — group.

Contrary to previous studies, he and his late research partner Alan Krueger found that an increase in the minimum wage had no effect on the number of employees.

Joshua Angrist. A US-based economist shared the Nobel prize for economics. (AP)

Profesor Card’s minimum wage research fundamentally altered economists’ views of such policies.

As noted by the Economist magazine, in 1992 a survey of the American Economic Association’s members found that 79 per cent agreed that a minimum wage law increased unemployment among younger and lower-skilled workers.

Those views were largely based on traditional economic notions of supply and demand: If you raise the price of something, you get less of it.

By 2000, however, just 46 per cent of the AEA’s members said minimum wage laws increase unemployment, largely because of Professor Card and Professor Krueger’s research.

Their findings sparked interest in further research into why a higher minimum wouldn’t reduce employment.

One conclusion was that companies are able to pass on the cost of higher wages to customers by raising prices.

In other cases, if a company is a major employer in a particular area, it may be able to keep wages particularly low, so that it could afford to pay a higher minimum, when required to do so, without cutting jobs.

The higher pay would also attract more applicants, boosting labour supply.

“That really surprising evidence on the impact of the minimum wage has shaken up the field at a very fundamental level,” said Arindrajit Dube, an economics professor at the University of Massachusetts, Amherst, who has duplicated and broadened Card and Professor Krueger’s research.

“And so for that reason, and all the following research that their work ignited, this is a richly deserved award.”

Professor Krueger would almost certainly have shared in the award, Dube said, but the economics Nobel isn’t awarded posthumously.

Professor Card also found an influx of immigrants into a city doesn’t cost native workers jobs or lower their earnings, though earlier immigrants can be negatively affected.

Professor Card studied the labour market in Miami in the wake of Cuba’s sudden decision to let people emigrate in 1980, leading 125,000 people to leave in what became known as the Mariel Boatlift. It resulted in a 7 per cent increase in the city’s workforce.

By comparing the evolution of wages and employment in four other cities, Professor Card discovered no negative effects for Miami residents with low levels of education.

Follow-up work showed that increased immigration can have a positive impact on income for people born in the country.

Professor Angrist and Professor Imbens won their half of the award for working out the methodological issues that allow economists to draw solid conclusions about cause and effect even where they cannot carry out studies according to strict scientific methods.

Professor Card’s work on the minimum wage is one of the most well-known natural experiments in economics. The problem with such experiments is that it can sometimes be difficult to isolate cause and effect.

For example, if you want to figure out whether an extra year of education will increase a person’s income, you can simply compare the incomes of adults with one more year of schooling to those without.

Yet there are many other factors that may determine whether those who got an extra year of schooling are able to make more money.

Perhaps they are harder workers or more diligent and would have made more money than those without the extra year even if they did not stay in school.

These kinds of issues cause economists and other social science researchers to say “correlation doesn’t prove causation.”

Professor Imbens and Professor Angrist, however, figured out ways to isolate the effects of things like an extra year of school.

Their methods enabled researchers to draw much clearer conclusions about cause and effect, even if they are unable to control who gets things like extra education, the way scientists in a lab can control their experiments.

Professor Card said he thought the voice message that came in at 2am from Sweden was a prank by a school friend, until he saw the number on his phone really was from Sweden.

He said he and his co-author Professor Kreuger faced disbelief from other economists about their findings.

“At the time, the conclusions were somewhat controversial. Quite a few economists were sceptical of our results,” he said.

As for the significance of the research, “the thing that has really influenced the field is the idea of looking for these pivotal events or things that have happened that could potentially inform our theorising and understanding of the world,” he said.

He paid tribute to Professor Krueger, saying that “I am sure that if Alan were still with us he would be sharing this prize with me.”

“I was just absolutely stunned then to get a telephone call,” Professor Imbens said.

“And then I was just absolutely thrilled to hear the news … that I got to share this with Josh Angrist and David Card.”

Professor Imbens said Professor Angrist was best man at his wedding and the economists were “both very good friends of mine.”

“Of course I’m thrilled,” Professor Angrist said.

“… It’s an honour to get the Nobel Prize and especially to be recognised with my winners, you know, Guido Imbens and Dave Card, who are wonderful scholars and I couldn’t be happier.”

Professor Krueger, who worked with Professor Card on some of the research that won the Nobel, died in 2019 at age 58.

He taught at Princeton for three decades and was chief Labour Department economist under President Bill Clinton.

He served in the Treasury Department under former president Barack Obama, then as Mr Obama’s chairman of the Council of Economic Advisers.

The award comes with a gold medal and 10 million Swedish kronor (over $1.55 million).

Unlike the other Nobel prizes, the economics award wasn’t established in the will of Alfred Nobel but by the Swedish central bank in his memory in 1968, with the first winner selected a year later.

It is the last prize announced each year.

https://ragheadnews.com

Leave a Reply

Your email address will not be published. Required fields are marked *