I Ingenuity and Creativity David Card and Alan Krueger Randall K. Q. Akee and Klaus F. Zimmermann David Card and Alan B. Krueger were jointly awarded the 2006 IZA Prize in Labor Economics. The IZA Prize honors individuals who have made profound contributions to the field of labor economics. Previous winners of the IZA Prize include Jacob Mincer, Orley Ashenfelter, Edward Lazear, Dale Mortensen, and Christopher Pissarides. These past winners have contributed to the field of labor economics by undertaking pioneering research on topics such as human capital investments, on-the-job learning, female labor supply decisions, trade union membership, program evaluation methodologies, compensation schemes and worker productivity, personnel economics, and the development of search and matching models for a variety of markets. David Card and Alan Krueger join this esteemed group of economists for their exceptional work in labor economics. It is difficult to overstate the contributions of these two scholars. Their work has spanned large and important spaces in labor economics: unemployment, minimum wages, migration, measurement error, unionization, wage differentials among various groups in the U.S., labor demand, social insurance and technological change. The citation count for their papers in the Social Sciences Citation Index shows the phenomenal extent of their reach in the economics profession. It is clear that in a discipline where most papers are seldom cited, the Card and Krueger papers (both their joint and independent papers) stand out for their influence; indeed, their 1992 Journal of Political Economy paper has been cited over 300 times. 1
Beyond their research and influence within specific subject areas, Card and Krueger have been extremely influential in econometrics methodology as well; they were at the forefront of employing an experimental approach in their research design and implementation. Both of these prize winners have made significant methodological contributions on instrumental variable estimation, measurement error, regression-discontinuity methods in addition to the use of natural experiments. The authors have served in various editorial capacities at some of the most esteemed economics journals such as the American Economic Review, Econometrica, Quarterly Journal of Economics, Journal of the European Economics Association, Journal of Labor Economics, Journal of Economic Perspectives and Economic Letters. Both Card and Krueger have been IZA Research Fellows since the formative years of the institute; Card joined in 1999, while Krueger followed in 2000. One of the most important themes of Card s and Krueger s work is their examination of the determinants of labor market outcomes. Their most prolific areas of research on these determinants have been on the role of human capital investment and institutions. They have explored this theme in a variety of areas in labor economics. For instance, their work has shown that observed wage differences across different industries cannot simply be explained by standard models of competitive markets. Instead, the role of unions, implicit contracts and other institutional factors may affect wages both within and between industries. Another institutional factor that Card and Krueger have explored in-depth is the minimum wage in the U.S. Increases in minimum wages, at least from a standard theoretical standpoint, should have adverse consequences for employment in affected areas especially for the low-skilled. Card and Krueger investigated the role of this particular labor market institution on the employment outcomes for low-skilled individuals in a variety of settings. In one of their most famous papers, Card and Krueger compare employment outcomes for low-skilled individuals in New Jersey and Pennsylvania in similar industries after New Jersey increases its minimum wage by about 20 percent (Card and Krueger 1994, Chapter 6 in this volume). Their research indicates that there is no evidence for a decrease in employment and even a slight increase in employment numbers. They conclude that the wage increase was merely passed on to customers in the fast-food industry. These results are a further example that the stan- 2
dard models of competitive markets do not fully explain all employment outcomes; alternative models such as a monopsonistic market might be a better fit in this case. This particular line of research has sparked significant controversy in the U.S. amongst other researchers. For instance, IZA Research Fellow David Neumark and William Wascher (2000) have called into question the data and instead use administrative payroll data to show a contrary result. Kennan (1995) argues that Card and Krueger may have been a little too forceful in their conclusions regarding the nonnegative effects of an increase in the minimum wage. Specifically, he calls into question whether a more representative industry could be found. Card and Krueger (2000, Chapter 7 in this volume) follow up their initial work with a larger data set using administrative data and are able to confirm their earlier findings. In this particular debate, IZA has taken the stance that minimum wages are not necessary nor are they desirable in Germany. Given the existence of extensive social welfare and assistance programs already, both on a scale and scope that do not exist in the United States, IZA has opposed the establishment of minimum wages in Germany (see e.g. IZA Compact 2002, 2008; Zimmermann et al. 2009). Card and Krueger explored another important determinant of labor market outcomes the human capital investment and the returns to that investment. Specifically, they have explored the effects of the quality of human capital investment on labor market outcomes. The papers on the effect of school quality changed the focus of the debate from student achievement in school to actual labor market outcomes. In their research, the authors employed relatively novel methodologies and data sets. This overlaps with IZA work in the area of school quality. For instance, IZA now houses the OECD Programme for International Student Assessment (PISA) data sets for use by researchers. In his research, Krueger (1999, Chapter 4 in this volume) used the novel Tennessee Star data which is one of the first examples of randomized experiments in labor economics (certainly it is the first for class size). In their research on the differences in school spending between North and South Carolina, the authors provide the data and the historical background information which determined demographic differences across the two US states several generations previously (Card and Krueger 1996, Chapter 3 in this volume). This information is crucial in establishing the plausibility of the natural experi- 3
ment between these two states. Their exposition here is an important primer for others who have employed the use of natural experiments in their own work subsequently. From this research, the authors find that more spending on school quality is an important determinant of the long-run return to education for children. The work of Card and Krueger fits nicely with the mission and spirit of the Institute for the Study of Labor. Over its more than ten years of existence, IZA has constantly striven to position itself at the intersection of sound academic research on labor economics and policymaking. Card and Krueger s research in the areas of school quality, wage inequality, the role of unions and changes in minimum wages have important implications for policymakers in not only the United States, but Europe as well. These issues have advanced to the center of the policy debates in the past few decades within the European Union as newer member states seek admission. The issues of differential skills and schooling, assimilation policies, and minimum wages and social protection legislation are important topics for all European countries individually and collectively. For example, the effect of new immigrants on the employment outcomes of natives is an important topic in Europe with free migration between European Union member states. In an influential paper, David Card examined the effect of an influx of new immigrants to Miami on the employment of natives. Utilizing a natural experiment, Card (1990, Chapter 8 in this volume) finds that the exogenous increase in Cuban immigrants due to the Mariel boatlift did not adversely affect employment in Miami. Card s research on this topic is especially important in the European context, where citizens of newly admitted EU-member states have the right of free entry into other EU states and anti-immigrant fears run high. David Card was an early advocate for program evaluation in Germany. He helped initiate the debate on labor market program evaluation in meetings in Berlin approaching the German Ministry of Labor with other IZA officials. As a result of these efforts, IZA has developed an entire research area and produced an influential book on this topic (Schmidt et al. 2001). IZA has since then played an important role in helping to establish a program evaluation tradition in German research and policymaking, which had a long-lasting effect on labor market reforms undertaken in the Schröder Federal Government after 2005. Beyond intensive policy advice to policy makers such as Chancellor Gerhard Schröder, Economics and Labor Minis- 4
ter Wolfgang Clement and the Head of the Nuremberg Employment Agency Florian Gerster, IZA, was also publicly and influentially advocating for the reforms (Zimmermann 2003, 2006). As a consequence, there is now some substantial evidence on the effectiveness of labor policy measures in Germany drawing from the findings of a growing research community (Eichhorst and Zimmermann 2007). Alan Krueger has served in various capacities in the U.S. federal government. In the Clinton Administration, he served as the Chief Economist to the U.S. Department of Labor from 1994 to 1995. Currently, Krueger has taken the position of Assistant Secretary for Economic Policy and Chief Economist of the U.S. Treasury Department. Card and Krueger s research agenda which explores human capital investment and labor market institutions on labor market outcomes has an enduring legacy. Their inspiring ingenuity and research efforts have provided important foundational findings that continue to be relevant for labor economists. The influential IZA Discussion Paper Series contains many papers that were directly inspired by Card and Krueger s research. Card and Krueger pioneered the exploration of these topics primarily in the United States; European researchers have taken up their efforts in the European context and have provided valuable insight into policy debates occurring in Europe and around the world. This book has four parts and contains some of Card and Krueger s most influential papers on the topics of school quality, earnings differentials, and minimum wages. Part II, the first main part, focuses on school quality and the differences in wages across groups in the U.S. A brief introduction written by the two authors provides insight into the four chapters in this section and the responses and critiques from other academics. The authors position their research in the historical context and discuss the novelty of their approach in determining the effect of school quality on earnings. The authors exploit several natural experiments which make it possible to improve upon previous research efforts where the nature of causality was difficult to isolate. The second main part of the book, Part III, focuses on the effect of changes in minimum wages on employment and wage setting. A brief introduction to this part once again provides unique insight into the evolution of this research agenda by the authors. They mention their motivation and the particular events which provided the impetus to undertake the particular look at minimum wage effects on low-skilled employment demand. The authors also discuss the re- 5
sponse to their results which showed no effect on increases in minimum wages on the employment levels of the low-skilled in affected areas. A final chapter in this section examines the role of fixed-wage union contracts when unexpected aggregate price shocks occur. In this setting, the author finds that real wages are negatively related to employment as the standard model would predict. Finally, the book concludes with Part IV, on thoughts about the research process and important lessons learned. The authors emphasize the importance of high quality data, well-specified survey design and sound economic models to guide the research endeavor. Card and Krueger thus deal with an issue of vital importance for economic science. In a joint effort with other economic research institutes, IZA has also demanded better data access for independent research in Germany for many years and eventually was successful. Today, IZA runs its own International Data Service Center (IDSC), which provides a wide range of data services including documentation of data sets as well as controlled remote data processing (http://idsc.iza.org/). The IDSC meets the data and technology needs of IZA s resident research community, the various global and virtual IZA research communities (such as its fellow and affiliate networks) and the research community at large. Owing to this ideal environment, the IDSC is exceptionally well connected to the research community. As a result, the center continuously receives feedback and suggestions which it turns into innovative data products for the analysis and documentation of scientifically relevant data. The IDSC thereby continuously develops its competence and expertise in data support, data access and data services for labor economists thus in some sense following the example of David Card and Alan Krueger. 6