Three economists share Nobel Prize for pioneering ‘natural experiments’

Three US-based economists have won this year's Nobel Prize for their work on real-world experiments that challenged received ideas, including by showing that raising minimum wages need not hurt jobs and that immigration does not always cut pay for native-born workers.

David Card, who is a professor at the University of California, Berkeley, shared the prize with Massachusetts Institute of Technology professor Joshua Angrist and Stanford University professor Guido Imbens for their central role in developing the so-called "design-based" approach in economics to answer central questions for society.

The committee awarding the prize, officially known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, said the three men had "revolutionised empirical research" by using natural experiments – real-life situations where chance events or policy decisions create similar conditions to those of a clinical trial.

Card, born in Canada in 1956, used these natural experiments to analyse issues such as the effect of minimum wages on jobs, the impact of immigration on wages and employment, as well as the returns that people get from education in terms of subsequent earnings and other labour market outcomes.

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One of Card's most influential studies, conducted in the early 1990s, compared what happened to fast-food workers in the adjacent US states of Pennsylvania and New Jersey, after the latter introduced a higher minimum wage. Contrary to the then prevailing wisdom, he found the higher wage did not hurt jobs, and might even have boosted employment.

The findings prompted further research in the US and around the world; as a result, many countries raised their minimum wage.

Card also triggered a rethinking of the effects of immigration, through his work analysing the effects of the 1980 Mariel boatlift on Miami's labour market. It showed that a sudden influx of 125,000 Cubans had no negative effects on wages or employment for low-skilled Miami residents, even as it increased the city's labour force by 7 per cent.

The Nobel Prize committee said Card’s work “showcased the power of exploiting natural experiments” and played a crucial role in shifting the methods of empirical research.

Harder to interpret

One problem with natural experiments is that they are often harder to interpret than clinical trials because researchers do not choose the participants and cannot know their motivations. The effects of spending more time in education are hard to assess, for example, because those who choose to study longer may already be those most likely to benefit from it.

Angrist and Imbens, who are close friends and colleagues, shared half of this year’s prize because of their methodological work in tackling this problem, the committee said.

Examining questions such as the effect of military service on earnings later in life, they developed a framework showing how precise conclusions about cause and effect could be drawn from natural experiments. The committee said this had “transformed” applied work, and was now widely used in economics, and increasingly in other social sciences, epidemiology and medicine.

Card – who initially thought the phone call from the Nobel committee was a practical joke – maintained in comments published by the University of California, Berkeley that his contributions had been “pretty modest”.

“Most old-fashioned economists are very theoretical, but these days a large fraction of economics is really very nuts-and-bolts, looking at subjects like education or health, or at the effects of immigration or the effects of wage policies,” he said. “These are really very, very simple things. So, my big contribution was to oversimplify the field.” – Copyright The Financial Times Limited 2021