A U.S.-based economist won the Nobel prize in economics Monday for pioneering research that transformed widely held ideas about the labor force, showing how an increase in the minimum wage doesn't hinder hiring and immigrants do not lower pay for native-born workers. Two others shared the award for developing ways to study these types of societal issues.
Canadian-born David Card of the University of California, Berkeley, was awarded half of the prize for his research on how the minimum wage, immigration and education affect the labor market.
The other half was shared by Joshua Angrist of the Massachusetts Institute of Technology and Dutch-born Guido Imbens of Stanford University for their framework for studying issues that can't rely on traditional scientific methods.
Together, they helped rapidly expand the use of “natural experiments,” or studies based on observing real-world data. Such research made economics more applicable to everyday life, provided policymakers with actual evidence on the outcomes of policies, and in time spawned a more popular approach to economics epitomized by the blockbuster bestseller “Freakonomics,” by Stephen Dubner and Steven Levitt.
In a study published in 1993, Card looked at what happened to jobs at Burger King, KFC, Wendy's and Roy Rogers when New Jersey raised its minimum wage from $4.25 to $5.05, using restaurants in bordering eastern Pennsylvania as the control — or comparison — group. Contrary to previous studies, he and his late research partner Alan Krueger found that an increase in the minimum wage had no effect on the number of employees.
Card and Krueger's research fundamentally altered economists’ views of such policies. As noted by the Economist magazine, in 1992 a survey of the American Economic Association’s members found that 79% agreed that a minimum wage law increased unemployment among younger and lower-skilled workers. Those views were largely based on traditional economic notions of supply and demand: If you raise the price of something, you get less of it.
By 2000, however, just 46% of the AEA’s members said minimum wage laws increase unemployment, largely because of Card and Krueger.
Their findings sparked interest in further research into why a higher minimum wouldn’t reduce employment. One conclusion was that companies are able to pass on the cost of higher wages to customers by raising prices. In other cases, if a company is a major employer in a particular area, it may be able to keep wages particularly low, so that it could afford to pay a higher minimum, when required to do so, without cutting jobs. The higher pay would also attract more applicants, boosting labor supply.
Card's work on the minimum wage is one of the best-known natural experiments in economics. The problem with such experiments is that it can be difficult to isolate cause and effect. For example, if you want to figure out whether an extra year of education will increase a person’s income, you cannot simply compare the incomes of adults with one more year of schooling to those without.
That's because there are many other factors that might determine whether those who got an extra year of schooling are able to make more money. Perhaps they are harder workers or more diligent and would have done better than those without the extra year even if they did not stay in school. These kinds of issues cause economists and other social science researchers to say “correlation doesn’t prove causation.”
Imbens and Angrist, however, figured out how to isolate the effects of things like an extra year of school. Their methods enabled researchers to draw clearer conclusions about cause and effect, even if they are unable to control who gets things like extra education, the way scientists in a lab can control their experiments.
Unlike the other Nobel prizes, the economics award wasn't established in the will of Alfred Nobel but by the Swedish central bank in his memory in 1968, with the first winner selected a year later. It is the last prize announced each year.
Additional reporting by the Associated Press.
