the 2021 asparagus rick's bank prize in
economic sciences in memory of alfred
nobel was awarded to these three
gentlemen david card for his empirical
contributions to labor economics as well
as joshua angrist and guido embinds for
their methodological contributions to
the analysis of causal relationships
causal relationships not casual
relationships nerdy economists certainly
aren't winning any awards for those but
these are perhaps even more interesting
the fact that this year's was a joint
prize with two groups being recognised
for their contributions to the field of
economics goes to show just how
consequential their work really has been
labor economics is something that
impacts all of us directly but perhaps
this has never been more apparent than
right now in the midst of a global
pandemic with hundreds of countries all
trying to put their economies back on
track without causing greater issues
down the road so was this all just a
coincidence
no not really no in recent years the
royal swedish academy of sciences has
actually been specifically targeting
academic work that has direct
applications in modern economies a great
example of this was the winners that we
explored last year paul milgram and
robert wilson whose contributions to
auction theory are actually being put to
good use as we speak linking the best
buyers with sellers in some of the most
complex transactions in the world this
focus on practical economic applications
means that these awards are a whole lot
more than some self-congratulatory
academic pompfest they are genuinely an
insight into new and creative ways that
some of the greatest minds ever are
changing the world around us it also
means that long-held economic opinions
that most economists simply assume to be
self-evident are being challenged the
work of this year's winners actually
changed my mind on an economic function
that i've spoken about pretty openly in
a lot of my videos so this will be a
great chance to have some of the most
brilliant economists in the world set
the record straight for both you and i
but i'm getting ahead of myself to truly
appreciate the nobel prize and the
contributions its recipients make we
need to as always understand a few
specific things
so
how does one actually qualify to win a
nobel prize what did this year's winners
contribute to the field of economics to
win their prize and how are their
academic advances actually being put to
good use in the real world
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the nobel prize was created by alfred
nobel a swedish chemist and
industrialist who was best known at the
time for stabilizing an incredibly
reactive compound called nitroglycerine
by basically combining this chemical
with clay it became much easier to
handle while still maintaining its
explosive potential what he had invented
was dynamite literally now in the
interest of not being put on a watch
list that's all i'm going to say about
that alfred nobel immediately saw the
destructive potential of his invention
sure it had industrial applications like
mining and controlled demolitions but
let's be real it was going to be used in
war this fact haunted the scientist
which is why upon his death in 1896 he
bequeathed the vast majority of his
assets to create a foundation which
would award people who had made the
greatest contributions to humanity in
five distinct fields physics chemistry
medicine literature and peace now you
might notice something's missing here
maths maybe but they have the fields
metal which is basically the same thing
just a lot less prize money but more
specifically there's no economics
economics as a separate academic
discipline wasn't really a thing until
the mid 19th century and even then most
people saw it as a combination of
political science business and finance
it really wasn't until the great
depression and the rise of people like
keynes and friedman that economics
became the topic of dinner table
conversations around the world
nevertheless it still had the potential
to do a lot of good being able to
efficiently and effectively allocate
resources has been instrumental in
lifting hundreds of millions of people
out of absolute poverty over just the
last five decades obviously i might be a
little bit biased here but advances in
economic theory can do just as much good
for humanity as advancements in all of
these other fields now the central bank
of sweden thought so too that's why in
1968 it partnered with the nobel
foundation to create asparagus rick's
bank prize in economic sciences in honor
of alfred nobel the sixth nobel prize
since then it has been awarded every
year around the same time as all of
these other prizes are given out the
recipients are awarded the same solid
gold medal and they share in the same
prize money although the economists have
their cup provided by the swedish
central bank not the nobel foundation
this prize money is no joke this year's
prize was 10 million swedish krona or
about the equivalent of 1 million
american dollars typically the people
that win these awards are already quite
wealthy in their own right certain more
controversial recipients were worth tens
of millions of dollars when receiving
their awards so the social expectation
was that this prize money would get
donated which it has been more often
than not but of course to some career
academics this is a life-changing amount
of cash and most people don't begrudge
these individuals hanging onto the money
for themselves now you might say oh but
mr economics man the real gift is being
recognised as a nobel laureate you can
make much more money just by leveraging
the notoriety that gives you and you
would be absolutely right mostly the
reason that i mentioned the money at all
is that the initial award criteria was
that these prizes would be given to
individuals or institutions that had the
greatest impact on their respective
field in the year preceding the award so
if i wanted to win the nobel prize for
2022 i would need to publish my research
before the end of 2021 while this system
made sense in theory and made for very
exciting competition the unfortunate
reality is that academia is not like
sport or the performing arts where a
contributions merit is immediately
verifiable and appreciable this caused
some embarrassments with awards been
given to people who really shouldn't
have received it like the portuguese
neurologist who won the award for his
pioneering research in lobotomies and
johannes fibiger who won the award for
discovering a parasite that apparently
caused cancer of course the peer review
process later showed that these theories
were completely unfounded but by then
the winners had already walked away with
their honours and their prize money it's
because of this that the preceding year
rule has mostly been abolished in favor
of recognising contributions that have
stood the test of time and even more
importantly actually being used in
practical applications outside of
theoretical settings where disclaimers
like ceteris paribus and ignore air
friction can't save you so this brings
us along to this year's winners in the
field of economics who have exemplified
this application over theory approach to
generate some insights that could
fundamentally change the way that we
work
labor is one of the factors of
production alongside land and capital
the theory is to make anything you need
some combination of these three factors
they're not always equal but you always
need at least a little bit of each labor
is the unique variable here because
almost all of us have access to an equal
amount of it by default we are one
person and we can do the work of one
person whereas one person can own a lot
of land and a lot of capital while
others own none this has made labor more
commonly called jobs a major factor in
people's lives determining everything
from where they live to who they vote
for now despite its importance most
economists try to simplify labour's role
in the economy as just another good or
service as such they assume that there
is a negative relationship between wages
and employment if you take a step back
and think about it this makes perfect
sense wages are just the price that a
business pays for a set quantity and
quality of labor and employment rates
are a function of demand for that labor
even people with the most elementary
understanding of economics know that as
the price of something increases the
demand for that good or service
decreases because less people are
willing and able to pay the higher price
for that item this has led many to
assume that raising minimum wages would
do more harm than good because it would
force employers to cut back on staffing
in an attempt to maintain business
profitability by this logic the reverse
is also true by reducing the minimum
wage it makes it cheaper for businesses
to employ people therefore they will
employ more of them some infamous
reports have actually called for
establishing a zero dollar minimum wage
because by this logic it would lead to
zero unemployment even the laziest of
staff members would be worth having
around if the business only needed to
pay them 15 cents an hour now despite
the huge social problems this would
cause there is one other more immediate
issue it just doesn't work remember when
i said at the beginning of the video
that the nobel prize for economics was
increasingly been awarded to economists
that emphasized practical applications
and experimentations in their research
well this is how our first laureate won
their prize david card is most famous
for a paper he co-authored in 1994 which
found no indication that the rising
minimum wage reduced employment he did
this by studying fast food workers at
major chains in new jersey after the
state raised its minimum wage from 4.25
cents an hour to 5.05 cents an hour in
1992. he then compared employment
numbers in these restaurants to
restaurants from the same chains just
over the border in eastern pennsylvania
where the minimum wage had not been
altered if the traditional economic
theory was correct then employment
levels in new jersey should have fallen
as they needed to cut hours to
compensate for the increased cost of
labor in reality the opposite happened
employment in new jersey actually
increased relative to eastern
pennsylvania it's important to note that
the study didn't actually suggest that
increasing the minimum wage would
increase employment it instead was
trying to prove that the minimum wage
had no impact on employment so even no
relative change would have been a
positive outcome for this study the
paper itself also didn't actually set
out to explain why this was happening it
was instead trying to show if there was
or was not a relationship between these
two variables it did inspire follow-up
research though that pointed to higher
disposable incomes increasing aggregate
demand in local areas in general
employing people is expensive and
difficult employers only do it if they
absolutely need to and if they
absolutely need to employ someone
because let's say more people are eating
out thanks to their new higher salaries
then within reason an extra dollar an
hour in staff costs isn't going to be
the make or break on that hiring
decision
card followed this paper up with a
similar study on the labour supply side
of this equation he did this by studying
the marial boat lift of 1980 which
brought thousands of cuban immigrants
fleeing communism into the united states
see if you can answer this question what
happens to wages and unemployment when a
city like miami sees a seven percent
increase in its labor force made up
primarily of unskilled laborers mind you
a reasonable expectation would be that
these excess workers would compete with
existing workers or just not be able to
find jobs at all which would
simultaneously increase unemployment and
lower wages but it didn't
again the paper itself didn't actually
cover the why it was more concerned
about proving or rather disproving that
this relationship actually existed these
papers along with a series of other
research papers published by cardini's
peers have had drastic impacts on the
way that economists understand labour
market dynamics these real world studies
are now having real world impacts on
policy decisions now these papers as
impressive as they might be would not
have been possible if it were not for
the work of the other two winners of
this year's prize joshua angrist and
gita wimbins who both shared 50 of the
prize with the remaining 50 percent
having been claimed by david card they
all got their own gold medal though so
that's nice these two won their award
for their methodological contributions
to the analysis of causal relationships
in plain english economists around the
1990s had a real problem of lying with
statistics they had gotten their hands
on computers that were powerful enough
to crunch huge data sets and were
drawing relationships everywhere and
anywhere the problem with these
relationships was that correlation
doesn't equal causation the famous
example of this is that ice cream sales
are highly correlated with drownings
despite this correlation ice cream does
not drown people and people that have
been drowned are not going to be hungry
for ice cream rather it is a third
variable a hot day which causes both of
these on a hot day people are more
likely to go swimming and more likely to
eat ice cream this is an obvious example
but when it comes to economics finding
these hidden third factors can be
extremely difficult but it's not
impossible i actually got called out for
my video exploring why cold countries
are richer than hot countries because i
concluded this correlation was not
spurious as it did not have some hidden
third variable a lot of people
rightfully asked how i knew that given a
hidden third variable would be well
hidden this is where instrumental
variables estimation comes in which
sounds really scary because it kind of
is i'm not going to lie to you on this
one guys this is an advanced statistical
method which aims to find causality not
just correlation but it's actually not
too difficult to understand the theory
behind it the best example of this was
one of angra's early papers on the
relationship between lifetime earnings
and military service angus wanted to
find out if the experience of serving in
the military caused lower lifetime
earnings because of factors like ptsd or
acquired injuries the problem was that
there were hidden variables that had a
direct impact on both the independent
and dependent variables in this study
now some of these could be controlled
for for example people from lower
socioeconomic backgrounds are more
likely to join the military and are also
more likely to have lower lifetime
incomes but that's not the fault of
military service that's just the
inherent relationship between being born
wealthy and living wealthy the
researchers knew this factor and could
easily adjust for it but what about
variables that can't be controlled for
someone that hates the idea of working a
professional nine-to-five job is also
going to be more likely to join the
military and also going to tend to have
lower lifetime earnings again this isn't
the fault of the military this is a
personality trait that would have
impacted their career earnings
regardless of if they decided to join
the military or not the problem is that
data pertaining to people's opinions on
professional working environments is a
lot harder to collect and therefore a
lot harder to control for angra's
solution to this was to use the data of
conscripts from the vietnam war the
theory was that since conscripts did not
willingly volunteer to be part of the
military they would be devoid of the
hidden variables that willing volunteers
would have had which could impact both
earnings and military service this
allowed angus to just look at how
military service affected earnings and
isolation as in how much does military
service cause a fall in income the
results were that conscripted veterans
earned just over 400 a year less than
their peers who were not conscripted a
pretty significant sum back in the 1970s
i only use this example because it is
one of the easier ones to understand but
both angus and inbenz have had massive
contributions towards the responsible
use of data in economics the practical
applications of the research these three
gentlemen have conducted over their
careers cannot be overstated it will
continue to have very real impacts on
the way that we formulate labor laws
deal with immigration and conduct
research on these issues well into the
future so congratulations to them all
and their fellow laureates who i'm sure
have made equally consequential
contributions towards their respective
fields
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