Real studies drive economic Nobel
Three experts share the 2021 Nobel prize in economics for showing how economics works in the physical world.
Economists David Card, Joshua Angrist and Guido Imbens have won the 2021 Nobel economics prize for their pioneering “natural experiments”.
Economists cannot conduct the type of rigidly controlled clinical trials seen in medicine or other branches of science.
Instead, they typically rely on ‘natural experiments’, using real-life situations to study impacts on the world.
Big questions like ‘How does immigration affect pay and employment levels?’, or ‘How does a longer education affect someone’s future income?’ are difficult to answer because there is no control case to use as a comparison.
It is often unclear what would have happened if there had been less immigration or if that person had not continued studying, for example.
However, this year’s Laureates have shown that it is possible to answer these and similar questions using natural experiments. The key is to use situations in which chance events or policy changes result in groups of people being treated differently, in a way that resembles clinical trials in medicine.
Using natural experiments, Dr David Card has analysed the labour market effects of minimum wages, immigration and education.
His studies from the early 1990s challenged conventional wisdom, leading to new analyses and additional insights.
The results showed, among other things, that increasing the minimum wage does not necessarily lead to fewer jobs.
His studies showed that the incomes of people who were born in a country can benefit from new immigration, while people who immigrated at an earlier time risk being negatively affected.
His insight helped authorities realise that resources in schools are far more important for students’ future labour market success than was previously thought.
However, data from a natural experiment is difficult to interpret.
For example, extending compulsory education by a year for one group of students (but not another) will not affect everyone in that group in the same way. Some students would have kept studying anyway and, for them, the value of education is often not representative of the entire group. Without natural experiments, it may not be possible to draw any conclusions about the effect of an extra year in school.
In the mid-1990s, Joshua Angrist and Guido Imbens solved this methodological problem, demonstrating how precise conclusions about cause and effect can be drawn from natural experiments.
“Card’s studies of core questions for society and Angrist and Imbens’ methodological contributions have shown that natural experiments are a rich source of knowledge. Their research has substantially improved our ability to answer key causal questions, which has been of great benefit to society,” says Peter Fredriksson, chair of the Economic Sciences Prize Committee.
“Natural experiments are everywhere,” says Eva Mörk, a member of the Prize Committee for the Alfred Nobel Memorial Prize in Economic sciences.
“This year’s laureates have shown that it is still possible to answer these broad questions about cause and effects and the way to do that is to use natural experiments.”
A more detailed description of their breakthroughs is available in PDF form, here.