Experiments with labour

| Updated on October 12, 2021

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.

Card’s immigration studies are economically and politically significant. He studies with Krueger the impact of a sizeable Cuban influx into Florida in 1980. The conclusions are surprising: the influx did not depress the prospects of locals, but in fact raised them; it, however, impacted the earlier lot of immigrants. “Card found no negative effects for Miami residents with low levels of education,” the Nobel citation says, perhaps because “natives switch to jobs that require good native language skills, and where they do not have to compete with immigrants for jobs”. The take-away here is that immigrants should not be simplistically viewed as taking away jobs from locals — a political trope that has gained ground the world over, from India to the US and Europe, fanning chauvinism. What is less exciting about their work is the positive correlation between education resources on offer in a region and the income level of the students in subsequent years. Except for those who believe entirely in rugged individualism, this should be quite obvious.

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.

Published on October 12, 2021

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