The 2021 Nobel prize in Economic Sciences in Memory of Alfred Nobel has been awarded to three economists, for their work using natural experiments to answer important questions – such as the impact of the minimum wages, immigration or spending another year at school on a person’s income.
Half of the award goes to David Card, of the University of California, Berkeley, “for his empirical contributions to labour economics”
The other half is shared jointly between Joshua D. Angrist, of Massachusetts Institute of Technology, Cambridge, USA, and Guido W. Imbens, of Stanford University, USA, “for their methodological contributions to the analysis of causal relationships”
The award explains that the trio all used natural experiments to tackle big questions about cause and effect.
Assessing how immigrations affect pay and employment levels, or the impact of longer education on someone’s future income, because you don’t have the alternative scenario as a comparison.
So the solution is to use natural experiments – situations arising in real life that resemble randomised experiments.
The Royal Swedish Academy of Sciences, who award the prize, explain:
Using natural experiments, 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. We now know 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. We have also realised that resources in schools are far more important for students’ future labour market success than was previously thought.
Data from a natural experiment are difficult to interpret, however. 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. So, is it even 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.
Peter Fredriksson, chair of the Economic Sciences Prize Committee, says the trio’s work has been of great benefit.
“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.
Incidentally, the award isn’t one of the original Nobel prizes. It was created by the Swedish central bank, Sveriges Riksbank, in 1968, but is still the most prestigious award in economics.
Card, Angrist and Imbens will share a prize worth 10m Swedish crowns (£838,000).
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