The Nobel Prize in Economics and the challenge to prejudice – La Tercera

Dany Jaimovich, Director of the Doctorate in Economics of the Faculty of Economics and Business of the University of Talca.

On October 11, it was announced that the economist David Card won the Nobel Prize in Economics for his contributions to the empirical study of labor economics, together with Joshua Angrist and Guido Imbens, for their methodological contributions to the analysis of causal relationships.

These contributions have implied a paradigm shift in economic thinking. Before them, the focus of research was on theoretical models that made it possible to explain certain aspects of certain phenomena, but which were often based on scarce data. The contributions of the new laureates led to the development of techniques that allow the use of very detailed data to understand the effects caused by public policies and other social phenomena. The blow to the chair is that these data are no longer used only to support a particular model, but also to understand causal relationships in real life, which often end up contradicting some fundamental economic models.

The best-known example is the study by Card, along with the recently deceased Alan Kruger, which showed that an increase in the minimum wage in the state of New Jersey in the 1990s had no impact on employment. This contradicted the standard model of the labor market, which predicted unemployment. Despite a shower of criticism for possible methodological flaws, the results turned out to be robust, and prompted the development of new theoretical models on the effects of increases in the minimum wage. Careful data analysis overcame model prediction, something increasingly common in economics.

Another bomb to the nineties economic rationality was the study of Card regarding the effect of the massive arrival of migrants in the wages of the receiving country. The traditional economic model predicts that a strong increase in the labor supply will push down wages and increase unemployment, a basic argument used many times against migration. Well, Card used a technique similar to that of the study of minimum wages in New Jersey, called “natural experiments”, to analyze the migration phenomenon. In 1980, in just a few months, more than 100,000 Cubans arrived in Miami, the so-called “Mariel Exodus”, which implied an increase of about 7% in the workforce, even greater if the low-skilled workers segment is considered. . What was the effect of this massive influx of foreign workers on local employment? None! Unemployment did not increase and wages were not reduced. This led to rethinking both basic economic theories and the prejudices of some towards migration. The explanations were the increase in production in certain sectors intensive in unskilled workers, the creation of demand for certain new services generated by the “Marielitos”, among others.

Card’s groundbreaking empirical works, and many others that followed him in the field of applied microeconomics, do not imply that there will never be the effects of raising the minimum wage or of a massive influx of migrants. On the contrary, the invitation of these studies is not to be prejudiced or to be carried away by technical paradigms, but to be rigorous in the use of data and flexible in theoretical modeling to understand complex economic and social phenomena.

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The Nobel Prize in Economics and the challenge to prejudice – La Tercera

Hank Gilbert