Nobel Prize in economics – Joshua Angrist, Guido Imbens and David Card

The young researcher Angrist was trying to study how veteran status affected an individual’s future earnings

He simply compared the wages of people who served in the army with those who didn’t and see if there’s any difference.

Government of Vietnam ran lotteries and divided total interested population of young age into 2 groups. i.e. A Treatment group who were trained to participate in the war and A Control group — that wasn’t trained.

The Nobel Committee states

Natural experiments differ from Clinical trials in one important way — in a clinical trial, the researcher has complete control over who is offered a treatment and eventually receives it (the treatment group) and who is not offered the treatment and therefore does not receive it (the control group). In a natural experiment, the researcher also has access to data from treatment and control groups but, unlike a clinical trial, the individuals may themselves have chosen whether they want to participate in the intervention being offered.

Their contributions to the field help researchers use natural experiments to better understand and answer central questions for society and that’s why they were awarded the Nobel Prize.

General Economics makes the following view about minimum wages:-

  1. Workers are already paid fairly according to the market
  2. Minimum wage higher than the market-determined wage upsets the natural equilibrium
  3. Cost of production will increase which would indirectly increase the prices of goods and would result in lower rate of buying by customers.

David Card and the late Alan Krueger come in, In the 1990s decided to adopt a series of “natural experiments” to understand the effect of minimum wage on employment rates.

In the US, the state of New Jersey(treatment group) set a new minimum wage that year. The neighboring state of Pennsylvania however didn’t follow suit. So we have a state that imposed a higher wage in 1992 and a control group in Pennsylvania that did no such thing. And the two economists began comparing employment rates in both cities before and after the wage hike. They picked 400 fast-food restaurants — since these establishments typically employ a significant part of their workforce on wages equal to or close to the legal minimum wage. And they measured outcomes.

Employment in New Jersey actually expanded with the increase in the minimum wage. Pennsylvania meanwhile saw no such growth. Subsequent research also pointed to the same anomaly. There was either a small positive effect or no effect on employment when minimum wages rose.

This is the benefit of Natural Experiments (especially in Economics field) where theory is always contradicting the practicality.