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Economy

A Nobel Prize for a revolution in economics

Goran K. Hansson (C), Permanent Secretary of the Royal Swedish Academy of Sciences, and Nobel Economics Prize committee members Peter Fredriksson (L) and Eva Mork (R) give a press conference to announce the winners of the 2021 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
Goran K. Hansson (C), Permanent Secretary of the Royal Swedish Academy of Sciences, and Nobel Economics Prize committee members Peter Fredriksson (L) and Eva Mork (R) give a press conference to announce the winners of the 2021 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

Sure, winning the Nobel Prize in economics may be one of the crowning achievements of David Card's storied career. And, yeah, he gets to split more than a million dollars with the two other winners of the 2021 prize, Joshua Angrist and Guido Imbens. But that's just the cake. There's also the icing. David Card teaches at UC Berkeley, so for him becoming a Nobel laureate comes with an extra perk: free parking for life. Seriously.

"Yes, Professor Card, in addition to your Nobel Prize — and, indeed, because of it — I'm pleased to award you a highly coveted parking space near your office," said UC Berkeley Chancellor Carol T. Christ on the morning of the Nobel announcement. "I've been told that, like many Berkeley faculty members, you actually ride your bike to work, so let me see how we might go about creating a special place for you to park it in."

We are eagerly waiting to see what UC Berkeley devises to help newly minted Nobel laureate David Card park his bike in style. As for the prize itself, it adds official pageantry to something we econ nerds already know about Card: his work, frequently done in collaboration with his late coauthor Alan Krueger, has completely reshaped the field of economics. Economists consider their work one of the opening salvos in what is sometimes termed the "credibility revolution," or the empirical revolution. This refers to a movement in economics to create innovative research designs, aimed at finding credible evidence to answer important policy questions. Following Card and Krueger's opening shots, Joshua Angrist and Guido Imbens parachuted in and gave the revolution another victory by deploying even more statistically sophisticated weapons.

Thanks to the work of these new Nobel laureates, economics these days has become more of an evidence-based science and less of an ideologically driven philosophy.

A New Way To Do Economics

Let's time travel back in time to see why Card and Krueger's work was such a revolution. It was the early 1990s. A Tribe Called Quest and Nirvana were blaring on sound systems. People were wearing neon colors and saying words like "cowabunga." And these two young, Ivy League economists were working on a blockbuster study that would not only revolutionize thinking about the minimum wage — but also revolutionize thinking about how economic studies should be done.

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The paper was called, "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania." Up until then, economists thought about the effects of the minimum wage as they did most other subjects — mostly in theoretical terms. Their view of the world was more influenced by cartoon models drawn on chalkboards than hard data. And this cartoon world said that the minimum wage kills jobs.

Card and Krueger wanted to see how the minimum wage affects jobs in the real world. They were inspired by the way researchers in the medical field had credibly shown cause and effect using randomized experiments. You know, randomly dividing people into two groups that are statistically identical. Researchers offer one group a treatment, like a pill or something. They then compare the outcomes of both groups, and, boom, they give us credible evidence about the effects of that pill. Card and Krueger dreamed of being able to do this in their research, but the problem for them — and all social scientists, really — is it's a logistical nightmare, if not impossible, to divide up large groups of people and conduct experiments on many kinds of pressing policy questions.

Lacking the ability to conduct a randomized trial, Card and Krueger pioneered an alternative method to credibly estimate cause and effect. When the state of New Jersey raised the minimum wage, they saw the opportunity for a "natural experiment," approaching the policy change as if it were a randomized trial. Fast-food restaurants in New Jersey were the treatment group. Fast-food restaurants just across the state border, in Eastern Pennsylvania, were the control group. Card and Krueger then looked at changes in employment in each state to see what the effect of the minimum wage was in New Jersey. They found that a modest increase in the minimum wage did not kill jobs. It was a bombshell for the economic world, challenging an orthodoxy that had dominated the field for decades.

Card used natural experiments to study a variety of other important policy questions. For example, the cartoon model of old-school economics said that immigrants lowered native-born workers' wages. But, in a 1990 study, Card analyzed what happened to the labor market in Miami after 1980, when Fidel Castro allowed thousands to leave Cuba and move to the United States. It was known as the Mariel boatlift, and, if you've ever seen the movie Scarface, you're familiar with the boatlift. It's how Tony Montana comes to the United States. Anyways, Card found that the large influx of immigrants "had virtually no effect on the wage rates of less-skilled non-Cuban workers." His work invigorated more research efforts on the topic and helped a generation of economists and policymakers reevaluate the costs and benefits of immigration.

Eva Mörk, a member of the Prize Committee for the Alfred Nobel Memorial Prize in Economic Sciences, told the press on Monday that Card, Angrist, and Imbens "have revolutionized empirical work in economics. They have shown that it's indeed possible to answer important questions even when it's not possible to conduct randomized experiments."

Speaking Monday morning on a video call with UC Berkeley administrators, David Card thanked his former doctoral thesis advisor and current collaborator, Orley Ashenfelter, for pioneering the "revolutionary change in the way economists do research" and leading the way for his work. Ashenfelter is an economist at Princeton University. As head of Princeton's influential Industrial Relations Section, which funds economics research, Ashenfelter supervised not only Card but also Joshua Angrist on their doctoral theses. Two former students getting the Nobel prize in one day. Not bad, Orley. We called him up to see if we could convince him to supervise our work at Planet Money. We settled for an interview.

"If you look at papers in economics journals these days, they are heavily influenced by the kind of work that these Nobel prize winners pioneered," Ashenfelter says.

Ashenfelter continues to have a working relationship with Card and Angrist, and he was excited for his former students. And he was also excited for his brand of evidence-based economics. This is the second award to go to researchers focused on getting experimental evidence to answer big questions. In 2019, Esther Duflo, Abhijit Banerjee, and Michael Kremer, pioneers in using randomized experiments in development economics, shared a prize for "their experimental approach to alleviating global poverty."

"It's a nice thing because the Nobel committee has been fixated on economic theory for so long, and now this is the second prize awarded for how economic analysis is now primarily done," Ashenfelter says. "Most economic analysis nowadays is applied and empirical."

The sad part about the Nobel Prize is, for whatever reason, it's not awarded posthumously. Alan Krueger, who died in 2019, would have surely shared the prize had he lived. But we don't need an official prize to also recognize his role in the revolution.

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