Renewed controversy over the Nobel Prize in economics
David Card’s surprising and befuddling nomination as co-recipient of the Nobel prize for economics renews the long-standing debate over the politics surrounding this award dating back to Milton Friedman’s delayed recognition in the 1970s. Card received the prize partly for a paper, co-authored by the deceased Alan Kreuger, purporting to debunk the consensus among economists that higher minimum wages trigger job losses. The nominating jury emphasized Card’s methodology as much as the paper’s confounding conclusion that a higher minimum wage “does not necessarily lead to fewer jobs.”
However, Card’s flawed methodology is what produced the questionable result. Basically, Card and Kreuger surveyed fast food restaurants about changes in their employment after the minimum wage was raised in New Jersey and then compared this with fast food establishments in Pennsylvania, where the minimum wage remained unchanged.
However, there are problems with voluntary survey responses. First, people who respond voluntarily are likely not random and are systematically different from non-respondents. After the huge controversy surrounding the Harper government making the 2011 long form Census voluntary, the average Canadian is likely more familiar with this distortion than Card and Kreuger were. Another problem with surveys conducted after an event takes place, as the renowned economist Thomas Sowell pointed out, is that only survivors can respond. Those businesses that could not adjust to higher minimum wages disappeared and therefore could not reply to the survey (Sowell likens this to asking survivors about the dangers of Russian roulette based on their outcomes). When Neumark and Wascher corrected this bias by studying the actual payroll data of firms operating before the wage hike, they found restaurant employment in New Jersey fell relative to Pennsylvania. Employment losses in the restaurant industry are primarily at establishments going out of business.
There is another methodological weakness in Card and Kreuger’s study. Looking at overall employment in an industry means the specific impact on employees paid the minimum wage can be swamped by what happens for higher paid employees; for example, fast food restaurants could employ more skilled employees as they automate while cutting back on minimum wage jobs, which need to be examined separately. This highlights another drawback of the Card and Kreuger survey, whose eight month time frame did not allow for the substitution of machines for labour, a process often requiring more time to implement. In the three decades since the Card and Kreuger paper, reviews of the extensive literature on higher minimum wages clearly conclude they depress employment, especially among youths.
Controversy has dogged the Nobel economics prize since its inception, including whether it should even be called a Nobel since it is funded by the Bank of Sweden and not Alfred Nobel’s original endowment (gadfly author Nicholas Taleb calls it the Memorial Prize in Economics called “Nobel”). Friedman did not receive his Nobel until 1976, several years later than most economists expected him to be honoured and a year after the Soviet economist Leonid Kantorovich, which seems like a pointed and deliberate insult. The delay in awarding Friedman a Nobel reflected, in the words of his wife Rose, that “the non-economists on the committee knew only of his more publicized role as a political gadfly out of sympathy with the dominant socialist philosophy of our time.” The selections of the Swedish academies are slanted to favour their collectivist preferences. Most egregiously, Barack Obama was given the Nobel peace prize soon after becoming President. Obama subsequently attacked Libya, authorized a troop surge into Afghanistan, and broke his promise to close Guatanamo Bay. These hostile actions led the committee’s secretary to admit in 2015 Obama failed to meet expectations, implying the award is not always based on achievement.
There are other problems with the Nobel for economics. Beyond drawing unwarranted attention to the occasional dubious research paper, its most insidious effect is it seems to sanction the winner’s opinions on matters far beyond their field of specialization. Friedman himself observed that “The announcement of an award converts its recipient into an instant expert on all and sundry” adding “I myself have been asked my opinion on everything from a cure for the common cold to the market value of a letter signed by John F. Kennedy.”
Friedman noted that the true measure of an economist’s stature is “what my successors fifty years from now will think about my professional work.” It is hard to imagine Card’s work receiving much more attention than Kantorovich’s in the decades to come, except as an example of the importance of constantly debating and challenging conventional wisdom. In economics, almost nothing is settled in the sense of being beyond questioning. Recognizing the value of dissent would have been a better reason for Card to receive such a prestigious award, in a world that too easily accepts the crude early attempts of experts to unravel complex subjects such as climate change and where woke adherents ardently attempt to asphyxiate academic arguments.
Awarding the Nobel to David Card is a setback for economics. Citing his methodology to study minimum wages appears to validate research that has serious design flaws. Worse, in the public’s mind the Nobel is viewed as endorsing a paper that contradicts the vast majority of research showing higher minimum wages lead to job losses and do nothing to alleviate poverty. Some day, the nominating committee will regret this award as have those who granted Obama’s peace prize.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.