Nobel Prize for Economics 2021

Nobel Prize for Economics 2021

News: The 2021 Nobel Prize in Economic Sciences was awarded to three US-based economists.

Details:
• Nobel Committee awarded half the Prize to David Card for his “empirical contributions to labour economics”
• Other half to Guido Imbens and Joshua Angrist “for their methodological contributions to the analysis of causal relationships”
• This is the first time the economic prize has been divided in this fashion with one half going to one awardee and other half divided across two awardees.In the past, prize money was divided equally between the awardees even if the prize was for different topics as is the case this time around.It may appear that the Nobel Prize has been given for two different contributions, but there is a common theme: “natural experiments.”
• David Card has analysed how minimum wages, immigration and education impact the labour market.One of the significant findings of this research was that “increasing the minimum wage does not necessarily lead to fewer jobs”.It also led to the understanding that “people who were born in a country can benefit from new immigration, while people who immigrated at an earlier time risk being negatively affected”.It also illuminated the role of resources available in school in shaping the future of students in the labour market.
• Joshua Angrist and Guido Imbens were rewarded for their “methodological contributions” to the research tool.Their work demonstrated “how precise conclusions about cause and effect can be drawn from natural experiments”.

What are Natural Experiments?
• Economists are often interested in causal questions such as the impact of education on incomes, impact of COVID-19 on poverty and so on.They are also interested is understanding the direction of causality.
• Economists have used two kinds of experiments to study these causality and direction of causality questions: random experiments and natural experiments.

Random experiments
• Under randomized experiments, the researchers allocate say medicines to a treatment group and compare the effect of the medicine with the control group which is not given the medicine.
• In 2019, the Nobel Committee gave awards to three scholars for their contribution to the field of randomized experiments.
• However, one cannot randomize experiments to study issues such as why certain people and regions are more unequal or have fewer educational opportunities and so on.

Natural experiments
• In natural experiments, economists study a policy change or a historical event and try to determine the cause-and-effect relationship to explain these developments.The trio used such natural experiments to make some landmark contributions to economic development.Natural experiments are more difficult for two reasons. The first is to identify what will serve as a natural experiment.
• Second, in a random experiment, the researcher knows and controls the treatment and control groups which allows them to study the cause and effect of medicine.But in natural experiments, such clear differentiation is not possible because people choose their groups on their own and even move between the two groups.
• Despite the limitations, the researchers could use the natural setting to answer some big policy questions.

Significance of Nobel Prize for Economics 2021:
• Earlier it was difficult to identify natural experiments and even if one identified them, it was difficult to generate data from these experiments.With increased digitalization and dissemination of archival records, it has not just become easier to identify natural experiments but also get data.
• Economists have been using natural experiments to help us understand the impact of past policies.
• As the 2020 pandemic struck, economists used the natural experiments approach extensively to analyse how previous pandemics impacted different regions and tried to draw policy lessons.
• The methodology date back to the early and mid-90s and they have already had a tremendous influence on the research undertaken in several developing countries such as India.For instance, in India, too, it is commonly held that higher minimum wages will be counterproductive for workers.
• It is noteworthy that last year, in the wake of the Covid-induced lockdowns, several states, including UP, had summarily suspended several labour laws.This included the ones regulating minimum wages, arguing that such a move will boost employment.The main learning is that minimum wages can be increased in India without worrying about reducing employment.