12 October 2021

Immigration means low wages? This year’s Nobel Prize winner has other ideas…

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Last week Boris Johnson claimed that ending ‘uncontrolled immigration’ would produce a high-wage, high-skill and high-productivity economy. It was slightly ironic, therefore, that this week the most prestigious award in economics went to David Card, whose groundbreaking work debunked the idea Johnson’s case relies on – that immigration forces down wages.

Card’s 1990 study – ‘The Impact of the Mariel Boatlift on the Miami Labor Market’ – looked at how an influx of Cuban migrants in 1980 affected the local labour market in Miami. In a short period, the city’s labour force increased by a pretty dramatic 7% (130,000), offering a perfect real-world testbed for Card to assess how less-skilled workers impact an economy. And his finding was clear-cut. The influx had ‘virtually no effect on the wages or unemployment rates of less skilled workers, even among Cubans who had immigrated earlier’. (His research has led to much recent reappraisal and re-reappraisal.)

Card’s empirical work helped debunk the ‘lump of labour fallacy’, the notion that there is a fixed amount of work to be done in an economy that can be distributed to create more or fewer jobs. In reality an economy responds dynamically to the number of people present. More people means more demand across the economy, a greater need for labour and, ultimately, a larger economy. It also often means a more productive economy because migrants increase powerful amalgamation effects, help fill skills gaps and provide new knowledge.

Card was awarded the Nobel not for one piece of research, but for ‘his empirical contributions to labour economics’ – contributions which also extend to the minimum wage and education.

In 1994, Card and Alan Krueger published a paper that questioned the conventional view that minimum wages increase unemployment. They compared employment at fast-food restaurants in New Jersey, where the minimum wage was increased from $4.25 to $5.50, and across the border in part of Pennsylvania where there was no change.

Card and Krueger concluded not only was there no evidence that the minimum wage reduced unemployment but, at least in this case, ‘the increase in the minimum wage increased employment’. Unfortunately for Card and Krueger, their findings did not stand the test of time. The world’s leading minimum wage expert, Professor David Neumark, has long-since debunked their conclusions using higher quality evidence from payroll data. (Neumark discussed methodological issues in minimum wage research in the Adam Smith Lecture in 2018.)

Nevertheless, the Nobel prize was not given to Card for his findings per se, but for his contributions to the methodology of economics. Likewise, his fellow prize-winners, Joshua Angrist and Guido Imbens, produced seminal papers looking at methodological questions in respect to empirical research.

This might sound abstruse, but it’s at the heart of what economists are engaged with – producing and testing a multitude of theories about how the world works. So, for example, we might want to know whether longer schooling improves incomes. But each person is only able to have a single quantity of education. That was precisely the question asked by Angrist and Alan Krueger in a 1991 paper.

In traditional science you can develop lab experiments. But in social science it’s hard, if not ethically dubious and practically impossible, to undertake experiments to prove theoretical claims. It is unlikely parents would approve of randomly asking half a cohort of children to do 13 years of school and another half to do 12 years. It’s also difficult to disentangle multiple things going on at the same time. Do people earn more because of longer schooling or do they simply stick around school for longer because of more ability?

Angrist and Krueger showed that it’s possible to use natural experiments to answer this question. They looked at a quirk in how US compulsory school attendance laws interact with birth dates which means individuals born at the end of the year start school earlier and thereby get a little more education. And, it turned out, those who had slightly more education (about .1 of a year) did have a slightly higher income (about 1%).

The natural experiment methods developed by Card, Krueger and Imbens – difference in differences, instrumental variables and regression discontinuity – are now the bedrock of almost all empirical economics work. Like so many great innovations, theirs now seems like an obvious approach. In fact, the ‘difference in differences’ technique had been used by a non-economist before. It’s how John Snow identified the cause of cholera in London’s Soho in the 1850s, by comparing those who did or did not drink from the Broad Street water pump. Nonetheless, the application of that method to economics was genuinely revolutionary.

Perhaps in the not-too-distant future an economist will write a fascinating paper on the disastrous impact of restricting migration after Brexit. They will certainly face challenges – factoring in the effect of a global pandemic, for instance – but whatever findings they alight on will owe a huge debt to the methods developed by Card, Angrist and Imbens.

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Matthew Lesh is Head of Research at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.