The 2021 Economics Nobel recognises major work in labour economics and ‘natural experiments’
Of the three US economists who have been awarded the Economics Nobel for 2021, David Card’s work on wage and employment stands out for its everyday connect and policy implications. Card, who receives half the Nobel prize sum, with the other half being shared by Joshua Angrist and Guido Imbens, has carried out deeply relevant research in the areas of minimum wage and immigration. Along with the late Alan Krueger, Card examined fast-food restaurant hiring behaviour in New Jersey following a rise in minimum wage, and compared it with neighbouring Pennsylvania where he carved out the control group. Being a sector “where pay is low and minimum wages matter”, the researchers came to a counter-intuitive conclusion: that a wage rise did not affect the number of employees. As the citation observes: “The overall conclusion is that the negative effects of increasing the minimum wage are small, and significantly smaller than was believed 30 years ago.” It is not uncommon for economists in India to argue that a minimum wage rise could curtail jobs and render businesses unviable. The subtext here is that a wage rise raises productivity, making it worthwhile for employers to hire more. The question, of course, is the situations in which wage increases hurt jobs.
Angrist and Imbens share the award for developing natural experiments — or studying situations as they evolve spontaneously in the world around us — as a research tool to derive ‘cause and effect’ relations in important economic phenomena. In being able to isolate a host of variables in real-life situations to establish a causation, they have set new benchmarks. The research on immigration, education and wages is a methodological watershed. However, theories that pertain to ordinary folk need to be grounded in a socio-cultural context. Behavioural economics and Game Theory, the Nobel favourites, are loaded with American-European assumptions.