Cheng Shi | Contributions and inspirations of the 2021 Nobel Prize in Economics: Respecting facts and stepping out of stereotypes

Cheng Shi, Chief Economist of ICBC International and Director of the China Chief Economist Forum

Zhang Hongyan, senior economist of ICBC International

"Their research has substantially improved our ability to answer key causal questions, which has been of great benefit to society - Peter Fredriksson, chair of The Economic Sciences Prize Committee." The 2021 Nobel Prize in Economics was finally awarded to David Card, Guido S. Guido W. Imbens and Josh Angrist, three economists, for their outstanding contributions to empirical methods of labor economics and methodological causal analysis. This article briefly summarizes the specific academic contributions of the three economists, and further discusses the significance and implications of the research results of the three economists.

Research contributions

David Cade's research focuses on labor economics, with specific research interests in topics such as minimum wage, return on education, labor income, educational input, immigration, and employment inequality. Card has published many academic papers with outstanding empirical and practical value in leading international academic journals such as America Economic Review (AER) and journal of Political Economics (JPE). In terms of research methods, he often questions the inherent theoretical findings from mainstream economics through empirical research using innovative methodologies such as double difference models (DID), natural experimental studies, and meta-analysis. In addition, Cade's data processing problems in natural experiments also have a wide range of reference values for economic researchers. Specifically, he has the flexibility to apply statistical analysis in empirical research to screen key data with higher credibility in big data, thus providing more reliable empirical results than traditional econometric models, which makes his findings more objective.

Regarding the results of the study, Card's biggest academic findings first focused on the study of the minimum wage. Traditional economics holds that raising the minimum wage leads to lower levels of employment in the labour market. However, in their article "Minimum Wage and Employment" (1993), Card and Kruger proposed that if there is a minimum wage difference in two markets with very similar working environments, the difference in the employment level of the two markets can be found through comparative analysis, so as to effectively verify whether the minimum wage has a significant impact on employment. Card eventually succeeded in questioning the conclusion that the minimum wage in traditional economics is significantly negatively correlated with employment through a series of empirical studies.

In addition, Card also provides a large number of influential empirical analyses in the study of the correlation between educational investment and educational returns. In the mid-1990s, a large number of studies found that student achievement was not significantly related to school commitment, and it was further suggested that academic performance and personal income improvement were not significantly correlated in the long term. As a result, many industry and political leaders are demanding less investment in educational resources. Card and his academic "confidant" Kruger analyzed the relationship between changes in income disparities between different ethnic resident sectors and changes in educational inputs, and finally demonstrated that there is a significant positive correlation between educational inputs and educational returns. This conclusion not only has a huge impact on academia, but also affects the continued high level of support for education investment by the federal government and some countries in Europe.

Card also has a different view of immigration than traditional economics. For example, In his 2009 article "Immigration and Inequality," published in AER, Card argued that immigration did not actually have a significant impact on wage levels in local markets. What can really solve the immigration problem is business. Whether businesses can absorb additional low-skilled labor by adapting their management models and production techniques is key to addressing the impact of immigration on the workforce.

Statistically, Kader proposed how to redefine and measure labor income. He believes that the proportion of labor income that needs to be paid attention to in the measurement of labor income is not stable. He stressed the concern about changes in the income of workers' human capital in addition to workers' wage income. At the same time, Card often uses meta-analysis to verify the empirical effects of different time series models to test the credibility of the fit results of different models.

Two other economists who share half of the Nobel Prize in economics are Josh Angrist and Guido W. Imbens. The two economists focused on econometrics and empirical microeconomics, especially in the empirical innovation of causal relationship analysis. Similar to Card, the contributions of all three are essentially the use of natural experiments to make a huge contribution to the test of causality. Angelist and Inpens have also published many influential academic articles in leading international journals such as Econometrica, the Quarterly Journal of Economics (QJE), and the American Economic Review (AER).

Similar to Card, Through the use of natural experiments and instrumental variable processing, Angelist has provided a wide range of persuasive empirical empirical analyses over the past few decades to help society effectively solve a variety of complex problems. These issues include education input, health insurance, immigration issues, labor input, terrorism, and quantitative statistics. Especially in the field of education, many of Angelist's articles have been regarded as classics of economics. For example, Angelist uses constructing tool variables and the two-stage Least Squares Estimate (2SLS) to solve the endogenous problem of the construction of the model of educational time and future wage levels. Thus effectively demonstrating that the extension of educational time can significantly increase future wage levels. As a result, he rejects the idea that the Compulsory School Attendance Act has little economic significance for individual students.

Other than that. Angelist also provides other empirical analyses with broad implications for the impact of school policy. For example, he looked at specific questions such as whether schools should devote resources to various incentives to improve student achievement. Among them, Angrist & Lavy (1999) research on the problem of class size in schools has been widely cited by the academic community. Specifically, Angelist used natural experiments and instrumental variables to find that for most areas, smaller class sizes were beneficial for improving student achievement. However, in areas with poor social climates, this relationship is not significant. This highlights the regional characteristics, the interconnection between teaching resources and the scale of teaching. Angerist and Krueger collaborated to propose the Fuzzy Discontinuous Regression Design, which provides reliable empirical evidence for studying the existence of peer effects. (Peer Effect - Partner Effect, when neighboring equal individuals interact in various social relationships, the behavior and decisions of one of them are influenced by the behavior and decisions of others in the same group)

Angelist also explores the impact of interactions between family members on the labor supply. For example, the influence of the number of children on parents' work decisions. His empirical research has shown that if a husband's personal education and income level is higher, then the wife does not reduce the labor supply because of the increase in children.

Finally, it is important to mention the outstanding achievements of Angelist and Inpens in advancing non-experimental microeconometric methods. The greatest contribution of Angelist and Inbens was to give a number of methods and considerations for variable estimation of instrumental variables applied to disposal effects in the fields of econome econometrics and epidemiology. This has effectively helped a large number of economists to more accurately analyze the specific causal relationships in economic operation.

A new change in economics

Contributions to experimental economics and practice have received increasing attention in recent years. In recent years, Nobel Economists have been awarded to economists who have made great contributions to the field of experimental economics. This reflects that experimental economics has received more and more attention from society. One major reason is that experimental economics can provide more effective policy advice on a wide range of social problems through more reliable and practical causal analysis. Whether it's Cader, Angelist, or Inpens, the three economists provide more dependent causal analysis and empirical evidence for solving a wide range of complex problems in society by applying natural experiments, double-difference models, or improved non-experimental data to specific areas of microeconomics (such as employment, education, health care, counterterrorism, policy effectiveness, and immigration research).

Economics requires a more critical spirit. The academic pursuits of all three economists reflect the importance of critical spirit to academic innovation. For a long time, in mainstream economics, the field of empirical microeconomics has not received enough attention for a long time. The academic contributions of the three new Nobel laureates have helped empirical microeconomics to successfully free themselves from the shackles of traditional economics. Whether from the personal academic careers of Card, Angelist, or Inpens, we can see that they have successfully countered different questions from the mainstream economic community through rich empirical results and rigorous causal analysis. This actually reflects the need for more critical and innovative economists in today's economics community, and on the basis of questioning the inherent conclusions of traditional economics, a new generation of economists needs to lead economics towards a more diversified development direction through bold empirical innovation and careful causal verification.

Implications for China

Break free from the shackles of academic dogma. As a latecomer academic powerhouse, Chinese economic research is easily influenced by the existing framework of traditional economics. This has narrowed the hypothetical space in which Chinese economists, both in the macro and micro realms, pursue perfect mathematical models. How to break free from the shackles of dogmatism, break through the constraints of the ivory tower, and thus creatively develop China's experimental economics in combination with China's actual situation, and provide empirical help for the widespread social problems in China, will be the academic mission of Chinese economic scholars.

Improve causal analysis skills. For economists in the market, the conclusions of the study need to be objective in the first place. Market economy scholars can more accurately describe the state of economic operation by constructing suitable experimental research methods, so as to find specific key factors for specific market problems and provide specific policy recommendations.

Improve the science of data applications. Data analysis requires consideration of multiple possibilities. By using natural experiments or double-difference models, we can help us identify which of the relevant data are valid and which are not. Flexible design of tool variables can improve the causal relationship in regression analysis and help economists more objectively discover specific connections between economic variables.

Attention is paid to specific research issues in the microscopic field. Fairness and justice are not only issues that China needs to pay attention to at present, but also an issue of increasing concern to the whole world. Whether it is China or other major economies, we will face a series of problems related to the security of social and people's livelihood, such as the aging of the labor market structure, the widening gap between the rich and the poor, the decline in personal disposable income, and the increase in the unfairness of education and medical resources. As economists, we should pay more attention to the wide range of microsocial issues under fairness and justice.

Respect the facts and get out of the box. The current background of the real world is a major change that has not occurred in a hundred years, changes occur all the time, and the impact on traditional theories and empirical thinking exists widely and is constantly increasing. For academic research and policymaking in China's economy, mastering data, respecting facts, and stepping out of mindsets are the best choices to open a new situation in chaos.

bibliography

Altonji, J.G. and Card, D., 2018. The effects of immigration on the labor market outcomes of less-skilled natives (pp. 137-170). Routledge.

Angrist, J.D. and Imbens, G.W., 1995. Two-stage least squares estimation of average causal effects in models with variable treatment intensity. Journal of the American statistical Association, 90(430), pp.431-442.

Angrist, J.D. and Keueger, A.B., 1991. Does compulsory school attendance affect schooling and earnings?. The Quarterly Journal of Economics, 106(4), pp.979-1014.

Angrist, J.D. and Lavy, V., 1999. Using Maimonides' rule to estimate the effect of class size on scholastic achievement. The Quarterly journal of economics, 114(2), pp.533-575.

Card, D., 2001. Estimating the return to schooling: Progress on some persistent econometric problems. Econometrica, 69(5), pp.1127-1160.

Card, D., 2005. Is the new immigration really so bad?. The economic journal, 115(507), pp. F300-F323.

Card, D., 2009. Immigration and inequality. American Economic Review, 99(2), pp.1-21.

Card, D. and Krueger, A.B., 1993. Minimum wages and employment: A case study of the fast food industry in New Jersey and Pennsylvania.

Card, D. and Krueger, A.B., 1992. Does school quality matter? Returns to education and the characteristics of public schools in the United States. Journal of political Economy, 100(1), pp.1-40.

Card, D. and Krueger, A.B., 1995. Time-series minimum-wage studies: a meta-analysis. The American Economic Review, 85(2), pp.238-243.