Nobel Prize for Economics 2021: Natural Experiments And the Causal Relationship                                                         (GS 3, Economics, The Hindu, Indian Express)

Nobel Prize for Economics 2021: Natural Experiments And the Causal Relationship                                                         (GS 3, Economics, The Hindu, Indian Express)

The Royal Swedish Academy of Sciences has decided to award the Nobel Prize for economics 2021, one half to David Card for his “empirical contributions to labor economics and another half jointly to Joshua D. Angrist and Guido W. Imbens “for their methodological contributions to the analysis of causal relationships”. They have basically provided us with a new insight about the labor market and manifested the importance of natural experiments in concluding the cause and effect relationships. This will for sure help us in finding answers to important questions for society. 

Many questions in social science which is related to the decisions taken by people deal with cause and effect. 

Understanding the Natural Experiments: For example, if there is an increment in minimum wages as per the law by the government, then will it affect the employment rate as the employer would hire fewer workers? Or something else would also come into play and will affect the employment rate. For example what if the employer has decided to pass on the burden of increased cost, due to increased wages to consumers. 

Questions: How do immigration affect pay and employment levels? Should immigration be considered as to reduce the availability of resources to the existing residents? What if the immigrant population contributed more to the economy and resulted in an increase in the income of existing residents.

How does the extension of compulsory education by one year for a group of a student will affect them? Will it affect in the same manner for all students in the group in terms of increasing their future income or will it be different for different students. Will the extension of compulsory education necessarily result in an increase in income for all students of the group?  What if some students do not look into the extension of education as to get an economic benefit, but to them, the value of education in itself is a benefit.  

Difficult to Answer: These questions are difficult to answer because we have nothing to use as a comparison. 

In the first question, we do not know what would have happened if there was no increment in the minimum wages. had the employment rate remained the same or increased if there had been no increment in minimum wages. In the second case, we do not know what would have happened, if there had been no immigration at all or less immigration. In the third question,  we do not know what would have happened if the students had not gone for the extension of education. 

However, this year’s Nobel Prize winners have shown that it is possible to answer these questions and similar kinds of questions using natural experiments. The concept of natural experiments resembles the concept of clinical trials in medicine. The key is to use situations in which chance events or policy changes result in groups of people being treated differently in a way that resembles clinical trials in medicine. It means that the outcome of any cause will be not depending upon that specific cause only as the same cause will be affecting differently in different situations. This approach of Nobel laureates spread to other fields as well and revolutionized empirical research. 

David Card has analyzed the effects of minimum wages, immigration and education on labour market,  using natural experiments. He has basically challenged the conventional wisdom of Empirical/Theoretical research. The results showed among other things that increasing the minimum wage does not necessarily lead to fewer jobs. We have now witnessed that the income of people who were born in a country can benefit from new immigration. We have also now witnessed and realised that the resources provided to a student in a school is important for his/ her success and play important role in students future labour market. 

Data from a natural experiment are difficult to interpret. In the mid-1990s, Joshua Angrist and Guido Imbens solved this methodological problem of interpretation, demonstrating how precise conclusions about cause and effect can be drawn from natural experiments. 

Card’s studies of core questions for society and Angrist and Imbens’ methodological contributions have shown that natural experiments are a rich source of knowledge. Their research has substantially improved our ability to answer key causal questions, which has been of great benefit to society. 

Information: The Nobel Memorial Prize in Economic Sciences is officially known as The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.  The Nobel Prize for economic science differs from other awarded by Royal Swedish Academy of Sciences in the sense that it is officially known by a different name. It is an award funded by Sveriges Riksbank and is annually awarded by the Royal Swedish Academy of Sciences to researchers in the field of economic sciences since 1968. However other Nobel Prizes have been awarded since 1901. 

Plutus IAS daily current affairs 14 Oct 2021

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