David Card of the University of California, Berkeley, Joshua Angrist of the Massachusetts Institute of Technology, and Guido Imbens of Stanford University shared the 2021 Nobel Prize in Economics for pioneering the use of natural experiments to estimate economic relationships.

a. What is a causal relationship in economics? Give two examples of relationships between economic variables that might be causal.

b. What problems can arise when economists attempt to statistically estimate a causal relationship?

c. What are natural experiments? How can natural experiments help to overcome problems with measuring causal relationships?

d. Suppose California increases its minimum wage to $20 per hour during a period when Iowa leaves its minimum wage unchanged. You attempt to measure the effect of an increase in the minimum wage on employment by comparing the change in employment among warehouse workers in California following the increase in the state’s minimum wage with the change in employment during the same period among workers in fast-food restaurants in Iowa. Are your estimates of the effect of the minimum wage likely to be accurate?

Briefly explain.