Huang Zhangkai: Labor Economics Plays a Major Role in the Nobel Prize—What Economic Issues Has It Addressed?

This article was originally published in Chinese by BK Economy on October 12, 2021. Click here for the original article. Translated by ACCEPT.

The 2021 Nobel Prize in Economics was awarded to David Card, Joshua Angrist, and Guido Imbens. Why have these three economists won the award and what are their major contributions? What is the practical impact and significance of the theories that they have proposed?

BK Economy, affiliated with the Beijing News, discussed these topics with Huang Zhangkai, associate professor in the Department of Finance at the School of Economics and Management (SEM) of Tsinghua University, deputy director of the China Center for Financial Research (CCFR) of Tsinghua University, research fellow at ACCEPT of Tsinghua University, and executive editor of the Journal of Government and Economics.

Huang Zhangkai

Associate Professor in the Department of Finance at the Tsinghua SEM;

 Deputy Director of CCFR, Tsinghua University;

Executive Editor of the Journal of Government and Economics

What is your impression of this year’s Nobel laureates?

After over a century of development, each branch of economics has developed with a very narrow focus. As a result, economists engaged in different fields of research may not be terribly familiar with each other’s work. Nevertheless, this year’s Nobel laureates are not the originators of any distinct economic theory, but rather have provided a complete set of tools applicable to the research of economists engaged in a variety of fields.

Therefore, compared with previous laureates, this year’s three Nobel laureates have reputations that transcend their respective fields, as their work has had a huge interdisciplinary influence. For instance, now other sub-disciplines of the social sciences increasingly involve the use of certain empirical methods.

How should we understand the contributions of the three laureates as detailed on the official Nobel Prize website?

Causal inference is a key topic in academic research that also has strong philosophical implications. We know that if two things happen at the same time, it does not necessarily mean that there is a causal relationship between the two. Even if two things happen in tandem, it does not necessarily indicate a causal relationship.

To use only one sentence to popularize the thoughts and contributions of Joshua Angrist and Guido Imbens, we can summarize their theories with a well-known phenomenon—namely, “correlation does not equal causation.”

In specific scientific research, causal inference is frequently adopted to help determine which factor contributes to what phenomenon. This methodology is not only used in economics, but also in other disciplines. For instance, in biomedical research, people have become increasingly interested in the effects of vaccines over the past two years.

Before the 1980s, empirical economic research was carried out in a relatively simple manner. Through the consistent efforts of this year’s three awardees, an increasing number of research tools have been developed to help scholars determine whether a causal relationship exists between the events A and B. These three scholars have conducted numerous studies in this respect, involving the difference-in-differences (DID) model, instrumental variables (IV) estimation, and regression discontinuity design, among other methods and models.

In particular, the most renowned example is the analysis of college admission scores. If the college admission score is set to 500 points, then we can compare the future development of students who score 501 points versus 499 points, respectively. Perhaps their other attributes are quite close since there is only a difference of one or two points in their scores. However, one of them has the opportunity to go to college, but the other fails to gain access to a college education, resulting in a huge discrepancy in their later life. Under such circumstances, we may assume that the difference is derived from the ability to receive a college education. In other words, whether one has a university degree will impose a significant impact on their life. However, is this impact imposed by college education, or is it because those who outperform others gain access to college education from the outset?

It should be noted that the tool of causal inference plays a vital role in empirical research, and can help us infer the potential impact imposed by certain things on others.

Why did the Nobel Prize choose these two fields of research this year?

The academic achievements of this year’s Nobel laureates are relevant to our lives, while their research findings are also of great significance to some larger themes. These findings not only have great implications in the field of economics, but can also be applied in sociology, political science, history, and other fields.

With respect to history, historians both at home and abroad have elaborated on the reasons for the rise and fall of countries over the past few thousand years. However, in most cases, they only identify correlation while failing to explore the causal relationship.

For instance, many people wonder why China lags behind in modern times, and over the last century, some scholars even proposed abolishing Chinese characters. These people found that Western countries are relatively strong, and they use alphabetic characters, thus identifying a correlation. Furthermore, they regarded such a correlation as equivalent to causation, postulating that those who use hieroglyphics are doomed to lag behind while those who use alphabetic characters can achieve great development. Now it is known to all that this is merely a correlation, not a causal relationship.

How has the work of these three scholars influenced China’s policy-making?

The contributions made by the three Nobel laureates have had a huge impact on China’s policy-making, not by giving recommendations on what China should do, but by providing a very useful tool for policy assessment.

An utterly vital application of such analytical methodology is in policy assessment. In the past, though the government rolled out numerous policies, there was not always a way to accurately assess the policy outcomes. However, through the findings of these scholars, it became feasible to assess the effects of the implementation of a certain policy on a case-by-case basis. In this way, the government has been empowered to optimize its ruling capacity and enhance its governance capability.

This application should be seriously considered not only by China, but by governments all around the world.