Nobel Prize in Economics/Sveriges Riksbank Prize 2021

Context: Three United States-based economists namely, David Card, Joshua D Angrist and Guido W Imbens awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2021 — often incorrectly referred to as the Nobel Prize in Economics.

Key Points

• They were conferred with the prize for their work on “use of natural experiments” on the impact of minimum wage, immigration and education on the labour markets.
• One half of the prize was awarded to David Card, while the other half of the prize is shared by Joshua Angrist and Guido Imbens.
• In the year 2021, David Card has been conferred the award “for his empirical contributions to labour economics”. He analysed the effects of minimum wages, immigration and education on the labour market.
• Angrist and Imbens have been awarded “for their methodological contributions to the analysis of causal relationships”. Both of them developed a research framework which have been adopted by many researchers who work with observational data.

Cause & effect

• This year's Nobel Laureates in Economics have answered questions such as the effect of immigration on pay and employment levels, and the effect on the income of an individual due to long education using natural experiments.

David Card study based on wages & jobs

Card’s use of so-called “natural experiments” (situations arising in real life that resemble randomised experiments) has been both revealing and exemplary.

• For example, it is commonly held that raising minimum wages lead to lower employment. The argument is that higher wages will increase costs for the firms and lead to employers recruiting fewer people. 

But is it the case that higher wages “cause” employment to fall? Or, is it the case that just because the two things have been seen to occur on several occasions, one has, incorrectly, started believing that higher wages lead to lower employment?

• Card used a “natural experiment” to test out this presumed casualty. In 1992, the hourly minimum wage in New Jersey was increased from $4.25 to $5.05. Card, along with Alan Krueger, studied the effect on employment in New Jersey and compared it with employment in neighbouring areas of eastern Pennsylvania. 
• “The results showed, among other things, that increasing the minimum wage does not necessarily lead to fewer jobs,” noted the Royal Swedish Academy. Card’s “studies from the early 1990s challenged conventional wisdom, leading to new analyses and additional insights,” they state.

Angrist, Imbens study based on education, pay

• Angrist and Imbens have been recognised “for their methodological contributions to the analysis of causal relationships”. 

They helped make sense of the data from such natural experiments. This is crucial because unlike a clinical trial or randomised control trial, in a natural experiment a researcher is not in control of the experiment. making it difficult to draw precise conclusions and firm up causal links.

• For example, extending compulsory education by a year for one group of students (but not another) may or may not affect everyone in the groups in the same way. 

“Some students would have kept studying anyway and, for them, the value of education is often not representative of the entire group. 

• So, is it even possible to draw any conclusions about the effect of an extra year in school?” the Academy notes. 
• “In the mid-1990s”, the duo “solved this methodological problem, demonstrating how precise conclusions about cause and effect can be drawn from natural experiments.”

Use of above concept in India's context

• The methodology, research and findings of these economists 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 Uttar Pradesh, had summarily suspended several labour laws, including the ones regulating minimum wages, arguing that such a move will boost employment.

According to Leading labour economists such as Professor Ravi Srivastava

• “Their studies did provide a justification for raising minimum wages in the US — a question on which the economics fraternity was very divided. I used it with other studies to justify a national minimum wage for India,”.

According to Radhicka Kapoor, Fellow at the Indian Council for Research on International Economic Relations

• The main learning from Card’s work is that minimum wages can be increased in India without worrying about reducing employment.
• She pointed out that minimum wages in India are very low. The national minimum wage, for instance, is just Rs 180 per day.
• Now, India has a minimum wages code; it will extend to unorganised sector workers. 
• “So, enhancing minimum wages is very important to improve incomes in the unorganised sector as well,” she said. 
• “This (learning that raising minimum wages do not hold back employment) is particularly important given the aggregate demand constraints that exist in the Indian economy, especially among those who are at the bottom of the income distribution”.

About Sveriges Riksbank Prize in Economic Sciences

• It is conferred in memory of Alfred Nobel and is widely known as Nobel Prize for Economics.
• This prize was started in the year 1968 by donation from central bank of Sweden called “Sveriges Riksbank” to the Nobel Foundation in order to commemorate the 300th anniversary of the central bank.
• Prize comprises of a 10 million Swedish kronor award money which roughly accounts for Rs 8.33 crore.
• It is officially titled as “Sveriges Riksbank Prize in Economic Sciences” in the Memory of Alfred Nobel”.