Nobel Prize in Economics: How Academy Laureates have challenged economic theory

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Three economists share the 2021 Nobel Prize in Economics: David Card, Joshua Angrist and Guido Imbens. His contribution, in the words of Eva Mörk, member of the awards committee, “has totally revolutionized the way we develop empirical work. [basado en la comprobación de hechos]”.

Precisely, the winners used “natural experiments” – born in the 1990s – that function as laboratory tests. Its function? Investigate situations that arise in daily life and allow the understanding of decisions made in the economic field.

SIGHT: Nobel Prize in Economics 2021: David Card, Joshua D. Angrist and Guido W. Imbens

The canadian David Card –In a contribution with Alan Krueger, who died in 2019– they conducted an experiment in the 1990s to determine the relationship between minimum wage and employment, a topic that is to say, had been present in discussions of economics.

The search for answers led the specialists to compare the situation of the labor market in the border area between New Jersey – where the minimum wage had been raised – and Pennsylvania – which maintained the amount.

“Card and Krueger looked at what happened in New Jersey with employment in fast food restaurants before and after the imposition of minimum wages. They wondered what had happened in Pennsylvania [ya que] it is a place that is very close to New Jersey “, detailed Yuliño Anastacio, economist and executive director of the educational platform Infox.

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The expert recalled that the study of this case called for natural experiments, which were not used much in economics three decades ago. “More than the result, which is paradoxical, the brilliance is in the method: it is one of the first times that the method of differences in differences”, He explained.

It is a method that allows compare the changes over time in the variable under study. In this case, there were two groups: one of treatment (New Jersey, where the minimum wage was raised) and another from control (Pennsylvania, where the amount stayed).

Taking into account the analysis carried out, Anastacio considered that the award awarded is a recognition of the method used, “A prize for creativity.”

And why was the finding paradoxical? Both Card and Krueger found that the increase in the minimum wage did not necessarily lead to fewer jobs, as conventional wisdom suggested.

“Card finds results that, at the time, could be contradicting economic theory”, commented economist Pablo Lavado. “It opens our eyes to think that, under certain conditions, economic theory so summarized probably cannot explain some results that occur in the data”, he claimed.

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Joshua Angrist and Guido Imbens

Until the 1990s, data from a natural experiment – such as that developed by Card and Krueger – were difficult to interpret; Nevertheless, Angrist and Imbens they were able to find a route to solve this difficulty by showing that it was possible to draw conclusions about cause and effect from such experiments.

The methodological contributions of Angrist and Imbens have proven that natural experiments are a rich source of knowledge “said the chairman of the Nobel Committee for Economics, Peter Frederiksson.

In this regard, Lavado emphasizes that a result must be read in its own context, since the findings may not be the same in a different setting.

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“If we are studying the effect of a legislative change in the minimum wage on the unemployment of fast food workers in New Jersey and Pennsylvania, then Imbens and Angrist they say that this effect that is being found as a consequence of the legislation – which is an exogenous shock – should be understood not as a change that can be extrapolated to the entire population, but rather as a local effect “Washed explained.

That being the case, the specialist continued, certain people react more strongly to the change made. Along with this, there are both temporary and structural factors –such as labor legislation– that can have an impact.

In 2009, Lavado recalled that he had the opportunity to participate in the causal inference course dictated by Angrist During two weeks. “[Fue] super fun and horizontal with the students. I learned a lot”he commented.

Anastacio, for his part, said in this regard that these methodologies can take advantage of the researcher’s capacity to be more observant, since different correlations are established.

“We need to embrace these methodologies that can give us greater insight on various topics, such as education and health”, he remarked.

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Nobel Prize in Economics: How Academy Laureates have challenged economic theory

Hank Gilbert