Stockholm, Berlin, Frankfurt Three US economists who have made decisive progress in research with so-called “natural experiments” will receive this year’s Alfred Nobel Memorial Prize for Economics, donated by the Swedish Reichsbank. The Swedish Academy of Sciences announced on Monday.
David Card, born in Canada in 1956, will receive half of the prize money of almost one million euros from the University of Berkeley “for his empirical contributions to labor market research”. The other half is shared by Joshua Angrist from MIT in Boston, born in the USA in 1960, and Guido Imbens from Stanford University, born in the Netherlands in 1963. They receive the award for their methodological contributions to the question of what conclusions can be drawn about causalities from natural experiments.
Card’s best-known contributions to labor market research interpreted policy measures as “natural experiments” in which it is possible, similar to medical studies, to compare a treated group and an otherwise identical, untreated group.
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One of these works, which Card carried out with Alan Krueger, who died in 2019, revolutionized economists’ understanding of the effects of minimum wages.
Until the early 1990s, there was unanimous agreement that higher minimum wages lead to higher unemployment. Card and Krueger shattered this consensus by comparing two groups of workers in the low-wage fast food industry.
Some were workers in the state of New Jersey, where the minimum wage had risen sharply, and only those near the Pennsylvania border, where the minimum wage remained unchanged. The “untreated” comparison group were workers in Pennsylvania near the New Jersey border. The result was that the significant increase in the minimum wage had not led to a reduction in employment in the sector that was particularly affected.
The contribution sparked a very heated debate on the methodology and the outcome. A later, large-scale study by a larger team of economists around Card, which compared regions close to the border with minimum wage changes in various states, confirmed the favorable result of the first study for minimum wages. To this day, the question of whether and from what level minimum wages cost employment is still the subject of intense debate among economists.
Immigration does not depress wages
A few years later, Card shook another consensus among economists with a similar study, namely that immigration depresses local wages. To this end, he examined the consequences of a brief wave of immigration from Cuba in various regions of Florida.
This study also led to a heated debate that continues to this day and to counter studies that accused Card of methodological errors, and reverse allegations against the other side, in particular the Harvard economist George Borjas.
In the mid-1990s, Joshua Angrist and Guido Imbens created the methodological basis for estimating the average treatment effect in a natural experiment. They defined the conditions that must be given so that causalities can actually be derived from the observations, i.e. that the effects were actually brought about by the treatment and not by chance or other influences. To do this, they combined methods that were previously used in economics and statistics.
“The research of the Nobel Prize winners shows that the state cannot always rely on the market and should intervene in important economic processes itself in order to prevent market failure,” commented Marcel Fratzscher, President of the German Institute for Economic Research (DIW) on the award ceremony.
Nobel did not have a good opinion of economists
While Imbens, who worked purely on the mathematical-statistical basics, was only known to insiders, Angrist, in addition to his now excellent basic research, also evaluated many natural experiments himself, especially in the field of education, which achieved a greater degree of awareness. The aim was often to find out how high the monetary return of a better education is or which educational policy interventions can produce a better teaching.
Just two years ago, the Swedish Academy of Science honored one economist and two economists for achievements in a closely related area of research, the “randomized control studies”. In these, as in medicine, researchers actually try to form a treated group and an otherwise comparable untreated group of people and to compare the results. The prize winner Ester Duflo was only the second woman to receive the Nobel Prize in Economics.
Unlike the other Nobel Prizes, the Nobel Prize for Economics was not donated by Alfred Nobel, who did not have a good opinion of economists. Rather, it was donated by the Swedish Central Bank on its 300th anniversary and is officially called the Swedish Reichsbank Prize for Economics in memory of Alfred Nobel. However, it is administered and awarded by the same institutions as the “real” Nobel Prizes.
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