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The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2021 has been jointly awarded to three economists. David Card, of the University of California, will receive half of the financial reward while Joshua D. Angrist and Guido W. Imbens will share the other half. The latter two teach at MIT and Stanford, respectively.

The prize this year recognises the economist’s work in ‘revolutionising empirical research’. In order to test a theory, empirical evidence must be collected as proof. The problem with collecting this evidence, however, is that it is not always ethical to do so. One particular method of conducting an experiment is known as a randomised control trial. Here, two groups are taken and amongst them one is given the treatment while the other acts as a counterfactual i.e, does not receive the treatment and the differences in outcomes are studied.

The issue has to do with the fact that you are usually conducting such experiments with people in real life situations. An example in relation to the Covid vaccine would be if you were to administer the vaccine to one group while choosing against doing so with another group. Obviously, the group that receives the vaccine will benefit greatly while the group that doesn’t will likely be subject to certain adverse consequences.

As a result, it is difficult to find out certain answers due to the ethics involved. The economists who won this year, however, have found a solution. Back in the early 1990s, David Card found that a randomised control trial sometimes naturally occurs in the real world. The evidence from these occurrences can be used to make deductions that either confirm or deny a theory’s hypothesis.

In 1994 for example, the state of New Jersey increased its minimum wage. At the time, the prevailing narrative was that if you increase the wage, the number of jobs would reduce as employers would be discouraged from hiring more workers. Card noticed that while New Jersey increased its minimum wage, its neighbour Pennsylvania maintained the status quo. He thus identified a randomised control trial that was occurring on its own and decided to compare the effects between the two states. He found that an increase in the wage had no substantial effect on the number of jobs available, thus disproving the existing notion.

He then realised that these natural experiments were occurring all around him. In 1980, for example, Fidel Castro finally made it legal for Cubans to emigrate abroad. 125,000 Cubans left to Cuba of whom half settled in Miami. This allowed Card to study the effects of immigration on the native labour market i.e, does a large influx of immigrants have wage employment consequences for the local population? The answer was no. He compared Miami with other neighbouring cities and found that the numbers largely stayed the same. This challenged the anti-immigration viewpoint held by many conservative economists.

Another example has to do with schooling. Researchers believe that each year of schooling carries with it the benefit of added earnings. So much so that they concluded each additional year translated to an extra 9% in earnings, which seems implausible. What this year’s laureates found was that the results vary for different people in a group. There are some students who have the natural aptitude to study further, and therefore it is not the additional year of schooling that makes the difference but rather their inherent abilities. For these individuals, the additional year made no difference. For others, however, the difference was perceptible.

The award of the prize to work relating to empirical experiments is a move away from the usual obsession with theoretical work. Most economics today is done via the empirical approach. While the theory serves as the bedrock and is equally important, the Nobel committee, and as result the academic committee, has focused a bit too much on the theoretical side of things. This will give economists motivation to keep at their empirical work.

“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.” – Peter Fredriksson, chair of the Economic Sciences Prize Committee.

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