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Nobel Economics Prize: What Are “Natural Experiments”?

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David Card, Joshua Angrist and Guido Imbens won the Nobel Economics today.

The work of David Card, Joshua Angrist and Guido Imbens, who were awarded the Nobel Prize in Economics on Monday, is based on “natural experiments,” an innovative method of empirical research developed in the 1990s.

Natural experiments are real-life situations that economists study and analyze to determine cause-and-effect relationships.

In some ways they are similar to clinical trials, in that researchers evaluate the effectiveness of new drugs by separating trial and control groups at random.

“We are doing something that can be done in the laboratory,” says Julian Pinter, a researcher at the University of Minho in Portugal and economist at BSI Economics.

But doing something under controlled conditions in a laboratory and doing it in the world are two different things.

Natural experiments differ from clinical trials—unlike scientists in the laboratory—economists do not control the parameters of the experiment.

The scope of these studies is enormous: in the cases of the Nobel Laureates, they covered education, the labor market, and immigration.

– Challenging preconceptions –

For example, Canadian David Card and his American colleague, the late Alan Krueger, who died in 2019, studied the relationship between minimum wage and employment in the early 1990s.

He compared labor markets on both sides of the border between the US states of New Jersey, where the minimum wage was increased, and Pennsylvania, where it did not.

Their research showed that, in that context, the minimum wage increase had no effect on the workforce.

This finding went against the prevailing theory at the time, which held that raising the minimum wage would destroy jobs as it would make it more expensive for companies to do business.

– more schools, more income –

Card also studied the relationship between immigration and the labor market using another case study: a 1980 settlement in Miami, Florida of tens of thousands of Cubans who were allowed to leave the island by President Fidel Castro.

The work of the economist showed that this wave of new arrivals did not have a negative impact on employment.

Collaborating with the late Alan Kruger, American-Israeli Joshua Angrist looked at the link between education and income.

They compared the time spent in the education system by people born in the same year according to the month of their birth.

People born at the beginning of the year – so they had the opportunity to drop out of school a little earlier – on average received less education than those born later in the year.

His salary was also low.

This allowed Angrist to determine that higher levels of education generally lead to higher wages.

Dutch-American Guido Imbens later worked with Angrist to refine his interpretation of those results.

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