October , 2021
Economics Nobel 2021 goes to three USA based econometricians
14:27 pm

Kishore Kumar Biswas

The Economics Nobel 2021 goes to three US based economists. One half of the award has gone to David Card, Professor of Economics at the University of California, Berkley. The other half has gone jointly to Joshua D Angrist of MIT and Guido W Imbens of Stanford University.  The economics Nobel citation states, “This year Laureates have provided us with new insights about the labour market and shown what conclusions about cause and effect can be drawn from natural experiments. Their approach has spread to other fields and revolutionised empirical research.” 

Actually, these econo-mists’ have many things in common. Some economists like Sudipta Sarangi, Professor of Economics at Virginia Tech, USA, considers that the choice of the Nobel Committee for Economics Nobel this year is precious since it has been given to those making a methodological contribution for establishing causality (the Hindu, October, 14). Economics as an academic discipline looks to establish causality among different variables or matters under study that helps implement government policy decisions. If one considers Adam Smith as the father of modern economics then his revolutionary book titled ‘An Enquiry into the Nature and Causes of Wealth of Nations’, also deals with analysing cause and effect relationships of different aspects of human behaviour. In economics, establishing causal relationships among different variables is important.

Meaning of Natural Experiments

This year, the three economists were awarded the Economics Nobel for successfully using the natural experiments method in establishing cause and effect relationships. To explain the importance of natural experiments, Peter Fredriksson, Chair of the Prize Committee was quoted as saying, “Sometimes nature or policy changes provide situations that resemble randomised experiments.”

The brilliance of these scholars lies in their ability to recognise these situations and identify the conditions under which causal links can be established using these naturally occurring phenomena (Sarangi). 

In 2019 Abhijit Banerjee, Esther Duflo and Michael Khemer were awarded an Economics Nobel whose method of experimentation was Randomised Control Trial (RCT) which is similar to the Natural Experiments (NE). One aspect where the NE method differs is that it is done on a naturally occurring phenomenon but in the case of RCT, one compares the outcomes in the treatment and no treatment (control) groups. Here, the researchers themselves create the treatment and no treatment situation. But in the case of the NE method, the experiment is done on an already established situation. Say for example, in one place a new government policy has been enacted but, in another place, there is no such new policy announcement. Now with the help of the NE method, impacts of the two regions can be studied.

Examples of researches that the three economists made

It is reported that David Card with Alan Krueger, who died in 2019, jointly studied the relationship between minimum wage and employment in the early 1990s. They compared the labour markets on both sides of the border between the US states of New Jersey, where the minimum wage had been increased and Pennsylvania, where it had not. The research showed, against the common perception, that 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 minimum wage would destroy jobs as it would make it more expensive to do business.  

Card also studied the relationship between immigration and the labour market using another case study. That was the 1980 settlement of tens of thousands of Cubans in Miami, Florida, who had been allowed to leave the island by President Fidel Castro. The work showed that the wave of new arrivals did not have a negative impact on employment. This subject was elaborated by Angrist who looked at the link between education and income. Angrist found out that higher levels of education generally led to higher wages. Guido Imbens subsequently worked with Angrist to refine the interpretation of those results.

Critique of Natural Experiments

It is reported that for some economists, natural experiments should be handled with caution. They argue that the sample sizes and the low frequency of observed events do not always allow conclusions to be drawn on a large scale.  

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