Nobel Prize 2021 for Economics - Public Policy Relevance

What is the issue?

David Card, Joshua Angrist and Guido Imbens were the 2021 Nobel Prize winners in Economics for their contribution in the field of labour economics.
Here is how their work, based on cause-and-effect related issues, is particularly relevant in public policy.

Randomised experiments are carried out to find out the cause and effect of any economic phenomenon.
Question is posed to the participants without telling them the purpose.
But this has the problem of selection bias and tends to be narrow.
E.g. the impact of the pandemic on schooling and children is hard to be analysed through random trials.
To overcome this shortcoming, Card, Angrist and Imbens used the observational data approach for answering questions of causation.

This approach is within the realm of natural experiments which cannot be influenced by the analyst.
In other words, it involves observing people's behaviour in the environment in which it typically occurs.
It makes observations as unobtrusively as possible so that participants are not even aware that they are being studied.
The 2019 prize too had gone to Abhijit Banerjee, Esther Duflo and Michael Kremer for their work based on the ‘experimental approach’.
Evidently, both sets of theories have their place in economics and add value.

Applications

To study the results of any action taken by, say, the government on the stakeholders concerned over a period.
To answer simple questions on, say, a course which must be offered to students in an university.
For companies, to fine tune their marketing plans.

Do more years of education lead to higher future income?

Their experiments showed that students who studied more earned higher income.
[Notably, this study cannot be done with a fixed set of respondents.
Understanding the socio-economic conditions and observing the target populations over a time period is important, which the observational data approach helped.]

Does an increase in minimum wage lead to lower employment?

This is a critical question for the labour market to find a balance.
The labour wants a higher wage. But companies like to be selective in paying higher wage to the more efficient.
David Card’s analysis shows that employment does not suffer with an increase in minimum wage.
Because, when minimum wage increases labour tends to become more efficient which helps the organisation to increase output.
So, labour costs do not get burdensome.

Do immigrants create problems to the local labour force?

This was one of the key issues in the US that came up especially under the Trump regime.
It was alleged that immigrants tend to take over the jobs of the local population.
David Card’s analysis shows this does not necessarily happen, and it depends on the level of work.

The larger question is whether corporates can wait for long to get these results before launching a product.
Often the product is differentiated and cannot be compared with stories of other companies.
So, such natural experiments tend to work better for government-driven programmes where experiences from the past provide signals for the future.
In other words, from the public policy point of view, these theories are very relevant and more likely to be pursued.

Source: Business Line