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«American Economic Association In Honor of David Card: Winner of the John Bates Clark Medal Author(s): Richard B. Freeman Source: The Journal of ...»

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American Economic Association

In Honor of David Card: Winner of the John Bates Clark Medal

Author(s): Richard B. Freeman

Source: The Journal of Economic Perspectives, Vol. 11, No. 2 (Spring, 1997), pp. 161-178

Published by: American Economic Association

Stable URL: http://www.jstor.org/stable/2138242

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http://www.jstor.org Journal of Economic Perspectives-Volume Number2-Spring 1997-Pages 161-178 11, In Honor of David Card: Winner of the John Bates Clark Medal Richard B. Freeman avidCardis the 1995 recipientof the John BatesClarkMedal,which the American Economic Association awards every two years to an outstanding economist under the age of 40. David is an empiricist par excellence, who has generated important and, in some instances, controversial findings on major issues relating to the labor market and public policy. David has increased our knowledge of the economy and economics in areas ranging from the intertemporal lifecycle model to wage indexation clauses in collective bargaining contracts to the effects of school resources on earnings to the employment of minimum wage workers.

David obtained his B.A. from Queen's University in Canada and his Ph.D. from Princeton. Most of his professional career has been spent at Princeton, where he has helped make the Industrial Relations Section one of the leading research centers in empirical economics and a fountainhead of intellectual excitement. While David has taught in the United States and works on many issues relating to the American job market, he is a native Canadian who also analyses Canadian economic issues and often contrasts developments in the two economies.

If one unifying principle runs through David Card's work, it is a belief in the power of empirical economic science-in the ability to use statistics creatively to make inferences about how the economy operates. The best way to appreciate the skill with which David explores empirical evidence is to do one thing before you read one of his papers: take the topic he is investigating, and ask yourself how you

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would go about providing evidence on it. Then look and see what he did. In many cases, you would not have thought of using the particular body of data in the way David has used it, though in retrospect it will seem obvious that this data is the right one for illuminating the issue and that David's treatment of it is just right.

David's work is characterized by innovative empirical scholarship of the highest quality. Modern computerized data sets contain hundreds or thousands or even hundreds of thousands of observations, so there is great scope to poke and probe interpretations in ways that were impossible in the not-so-distant past. David attacks such data with the appropriate battery of econometric artillery. He identifies new sources of exogenous variation in key variables and exploits this variation artfully.

By finding a plausible source of unanticipated or exogenous change in economic incentives-a "natural experiment"-he obtains more convincing results than is possible from structural models that seek to parse supply and demand or other forms of behavior absent clear-cut unanticipated variation in variables and that offer little possibility to test the postulated structure. David reports his results in an objective manner that resembles a laboratory scientist reporting an experiment, giving the findings and the statistical or interpretative problems that he could not fully address. The weight and persuasiveness of the argument is in the evidence and in his artful treatment thereof, not in the rhetoric.

Because David's approach to economics is so data-based, and because he has an extraordinary ability to find and to analyze the appropriate data for particular problems, you probably would not want him to defend you in court if there were incriminating evidence against you. But you would want him to investigate the burglary of your home. The true empiricist is, after all, not a lawyerarguing skillfully for his client (or a particular model of reality), but a detective searching for and assessing evidence. The achievement of David (and his peers and students) is to have exploited modern computer-based technology to develop a micro-based empiricism that has more authority than earlier empirical work. As a leader and exemplar of this new empiricism, David has influenced both the approaches taken and topics studied. The issues David investigates lie at the heart of labor economics, but the new empiricism that he exemplifies applies to other areas of economics as well. That the profession has given the Clark Medal to an economist who believes first and foremost in the evidence shows how highly we value the difficult process of drawing inferences from data and how much we appreciate convincing empirical studies, even if some findings sometimes challenge our own strongly held beliefs.

Issues and Findings

Recognizing that some economists are not as deeply interested in the labor market issues on which David works as they should be, and that others are more into developing theories of how the world works than putting those theories to tests (you don't know what fun you are missing!), I provide a tour of what David has done on a variety of topics. This will include works specifically cited in the citation RichardB. Freeman 163

David E. Card

of the Clark Medal award-like his 1990 paper on real wages and employment determination under collective bargaining contracts [ 16], and his work on the minimum wage-as well as other studies that could easily have been cited as well.

Table 1 chronologically summarizes David's papers. As is conventional for papers of this sort in this journal, all citations to Card's work will be by number to the works listed in Table 1. It will become apparent that papers of the same topic often attack a question from different vantage points and with different data. If this produces qualitatively different results, David so reports. There is no theological "defending the faith" or protecting some Holy Grail economic model, whatever that may be, in this body of work.

Intertemporal Labor Supply The study of intertemporal labor supply analyzes how individuals allocate their time over the life cycle in response to pecuniary incentives. To many economists, this theory offers an attractive explanation of a host of labor supply phenomenon, including cross-section or cohort changes in time worked with age, the secular trend toward less time worked, and life-cycle changes in hours worked. Perhaps the most controversial claim about this theory is that it offers a useful framework for explaining movements of aggregate unemployment over the business cycle.

Whatever one's priors about the relevance of intertemporal labor supply theory to observable behavior, the appropriate way to address the theory is through evidence. David's first published paper [1] (joint with Orley Ashenfelter) examined the intertemporal labor supply model with time series data and concluded that the 164 Journal of EconomicPerspectives theory did not adequately explain changes in person-hours worked over the business cycle. In work with John Abowd [9; 12], David found that changes in earnings and hours among individuals was similarly related in several micro data sets and gave a modesdly more favorable report on the life-cycle model.

David's 1994 assessment of the status of empirical work on intertemporal supply [29] draws on and updates his earlier studies and the work of other economists who have explored the life-cycle model. In this and other papers that "test theory," David explicates a simple version of the theory focused on its empirical implications, then presents some facts that the theory should readily explain, and goes on to explore the more complex and subtle relations in the data that the theory suggests.

In particular, this deeper level of exploration enters the world of empirical detail, not your father's world of "stylized facts."

Looking at hours worked in a cross-section, David notes that between the ages 30 and 50, wage profiles rise greadlyfor college graduates but not for less-educated workers. Assuming similar taste parameters by education, these differences in wage patterns should have produced a rising profile of hours worked for college graduates relative to high school graduates. But hours profiles are similar. This does not "disprove" (whatever that may mean) the life-cycle model but surely shows its limitations; or as David [29] puts it: "To explain these data with a simple life-cycle model requires a fairly elaborate set of taste parameters."

David further notes that more-educated groups of workers and those in highpaying occupations work more over their lifetime than other workers, which raises questions about the conventional view that income effects due to higher lifetime wages explain the secular drop in time worked. With respect to cyclical changes in employment, the usual assumption is that lifetime income or wealth is constant and that individuals respond to changes in wages via substitution effects. Since real wages change little over the business cycle, the life-cycle model needs high elasticities of intertemporal substitution to account for the cyclical variability in employment. David uses estimated intertemporal elasticities to show that while the lifecycle model worked well during the 1975-1987 period, it did not do so in earlier periods, and he points out that because real wages declined for many workers in 1975-1987, there may have been important unexamined wealth effects in that period as well as intertemporal substitution. Turning to individuals, David notes that hours worked vary far too much among individuals to be explained by estimated intertemporal substitution elasticities and that "as it stands, the life-cycle model provides essentially no insight into the year-to-year variation in individual variations."

The bottom line is a negative report on the ability of the life-cycle labor supply model to shed light on many of the empirical issues that it addresses. One possible response to the failure of the model to pass muster would be to throw one's hands in the air: economics is too tough; theory is too complex; and the data are too imperfect for us to truly test anything, so perhaps we should back off from the evidence and pursue some other research strategy, like calibrating simulations to stylized facts. Another response might be to cheer the inconsistencies between the In Honor of David Card:Winnerof theJohn Bates ClarkMedal 165 Table 1 Books and Papers

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model and the facts: rational maximizing models are too simple to fit a world of

heterogenous individuals subject to diverse social influences and changing tastes:

perhaps we should back off from using the model and pursue some other strategy, like exploring the psychology of behavior in greater depth.

David follows neither of these directions. He suggests two roads to pursue in illuminating labor supply issues: to examine the possibility that short-run real wage changes alter anticipated lifetime profiles (and thus have income effects as well as substitution effects), and, more radically, to reconsider the notion that hours are determined by the individuals independent of employer demand conditions. My guess is that David prefers the latter approach, but he does not shortchange the former: the empiricist's approach is to give a fair shake to alternative plausible possibilities even if they do not accord with one's own predilections.

Collective Bargaining Although union density has fallen in the United States in the past 30 or so years, much can be learned about economic behavior from analyzing the outcomes of collective bargaining. Moreover, union density has remained roughly constant in Canada, so that collective bargaining remains a central mode of establishing pay and employment in that economy.

David's first paper on collective contracts examined cost-of-living escalators in Canadian union contracts [2]. He characterized the often complex COLA clauses in terms of a single statistic, the marginal elasticity of the contract wage rate to increases in prices, and he found wide differences in these elasticities by industry.

He then found that this marginal elasticity was higher in industries whose prices are more closely linked to inflation [5].

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