David E. Card

The importance and human element of labor economics

Card will be the first to admit that his branch of economics, labor economics, is often seen as surprisingly unimportant in some ways. While aspirational economists will be introduced to the labor market and wages, they’re studying interest rates, unemployment, and the more macroeconomic, abstract angles. To Card, however, labor economics is one of the most relatable, tangible branches of the field.

“The reason why we're important is because early on in the 1980s, we started using large micro datasets to study people,” says Card. “And we focused on questions about how people are succeeding or failing in the labor market, why people are poor, why people are unemployed, or whether it’s valuable to have more education. Those kinds of questions are pretty salient.”

Because of the focus on large datasets and casual questions, labor economics is more scientific, according to Card, and has influenced the rest of economics to move in that direction as well. Labor economists, he says, work much more on the questions of what’s being done and how to analyze that.

We focused on questions about how people are succeeding or failing in the labor market, why people are poor, why people are unemployed, or whether it’s valuable to have more education.

Who earns what and why

One of the topics Card has researched, and been most interested in, is wage inequality and the driving forces behind it. Essentially, examining how much one person earns versus another and why. According to Card, wage inequality is driven by things like education, gender, race, location, and other factors that people don’t really know how to quantify like mathematical ability, ambition, and a willingness to work hard. One of his more recent studies focused on wage and racial inequality within Brazil.

“Half of the population in Brazil is considered to be non-white and almost all Brazilians are concerned about issues of racial equality these days,” says Card. “Luckily, Brazil has pretty high-quality data available and it allows you to look at the hiring choices of individual employers, so you can follow over time what happens to white and non-white employees in a given place.”

“What you see is a systemic pattern where firms that tend to pay higher wages tend to hire fewer non-white workers,” he continues. “And that pattern holds up even when you look at the composition of all of the employees around them. We showed that that difference in hiring patterns accounts for 20 to 30 percent of the racial wage gap in Brazil.”

The minimum wage debate

The work that Card is perhaps most notable for is his research on the minimum wage and it began with fast food chains almost 30 years ago. New Jersey had proposed an increase to the minimum wage, which gave Card and his co-researcher on the topic, Alan Krueger, time to conduct interviews before the increase went into effect and then to do a comparative study with neighboring states where there would be no change. They found that employment rates actually went up after the raise, which caused a considerable amount of backlash.

“There were quite a few negative comments written in popular magazines. Other economists weighed in, mostly the more conservative kind,” says Card. “One thing they thought was that we'd screwed up the data, that we didn't know what we were doing. Another thing they thought was that we must have somehow misinterpreted the data, that there was something else going on that we didn't quite understand and that we were very ideologically trying to push the idea of raising the minimum wage. We subsequently wrote a book about minimum wages and never once in the book did we say you should increase the minimum wage or lower it. We tried to stay away from that and really think about it more as a question about how the labor market works.”

While Card found himself a controversial figure during this time in his career, the tide has changed. Whereas the old economic textbooks described the minimum wage as a largely terrible idea, slowly those sections were removed. A few years after that, a new section was added presenting evidence that maybe it wasn’t so bad after all. The new text was largely based on Card’s findings.

“I would say the views of younger economists are a little bit more in alignment with the results in our study, possibly because our study made its way into the textbooks,” says Card. “Our results don’t necessarily prove one way or the other that you should raise the minimum wage. Our results were trying to say that the labor market works differently than people think.”

Our results were trying to say that the labor market works differently than people think.

Migration’s impact on local labor markets

Card describes a natural experiment as an incident or episode where something very specific and somewhat unexpected happens in one place and not others, which sets up the possibility of comparing the effect of that episode in the place where it happened relative to other places. The Mariel boatlift, a mass emigration of Cubans to Miami in 1980, provided Card with the opportunity to study the effect of migration and immigration on a local labor market.

“It was creating a fairly large increase in the number of lower skilled workers who were looking for work in Miami,” says Card. “And so, I compared what happened to Miami and happened in four other cities, which were the control group.”

In this study, Card found that the large inflow of workers to Miami did not lead to a rise in unemployment, nor a reduction in wages in comparison to other cities, which some people had feared it would. The findings of this research are more nuanced according to Card because migration and immigration are more emotional topics to people than say the minimum wage.

“You can always find some economists who will say that immigration is terrible,” says Card. “But historically, immigration was seen as a positive force for the economy by most economists. And the only concern about immigration was that there might be some negative effect on low skilled workers who are most competitive with low skilled immigrants. And I would say that some of my research and lots of research by other people has suggested that those negative effects are fairly small.”

Historically, immigration was seen as a positive force for the economy by most economists.

Closing the gender gap in economics

Another area where Card has used similar natural experiments to highlight inequality is within his own field of economics. Card and his co-authors wanted to explore whether female authored economic papers are judged more harshly than their male counterparts. They took all submissions from four major economic journals and used how many citations it gets after publishing as a way to measure a paper’s overall quality. If a paper was initially rejected but ultimately went on to get a lot of citations, there would be evidence that a negative bias against female authors and female teams existed. While Card said it wasn’t a huge difference that they found, it was a significant difference.

“We knew the gender of the referees and we didn't find any evidence that female referees or male referees treated female submissions differently,” says Card. “But it looked like, in fact, everybody is a little harsher on female author papers.”

Looking ahead

Card never set out to focus on political leaning issues, nor does he make policy suggestions. Yet his work has fundamentally shifted how many components of the labor market actually work, so with his current focus on locational wage differences, there may be more Card-inspired changes in store.

“For a very long time it was very hard to do. The data to do that locational wage difference analysis in the United States has just become available,” says Card. “I’m trying to understand what it is about certain areas of the United States where it seems like people have relatively modest education levels that they have pretty limited job opportunities. And that cycle seems to be repeating so the children growing up there are also not doing particularly well. I’m trying to understand why that is, what's wrong with those regions? Why don't employers invest there?”

While he’s focusing on data within the US at the moment, the question of why wages are enormously higher in some places than other presents itself in almost every country.

If we could make a little bit of progress there, it would really help us to understand the way the labor market and society is functioning.

“Some of that seems to be about where employers want to locate and are willing to pay higher wages there,” he says. “Workers that are, for instance, in Northern California earn a large wage premium relative to other parts of the country, but it's extremely expensive to live here. Workers that move from one place to another experienced some gains in wages, but not enough to actually offset the costs of that. In Britain, the same thing is true in London versus the rest of Britain. It's difficult to know how to fix that or what kind of things to recommend about that.”

The complexities that lay within locational wage differences and economic circumstances also contribute to the difficulty one would face in proposing a national minimum wage. And this again reinforces Card’s view that labor economics is crucial to the field of economics.

“There are parts of every country where it seems like things aren’t going well and we don't really understand why,” says Card. “If we could make a little bit of progress there, it would really help us to understand the way the labor market and society is functioning.”