General information Introduction: Causal inference

Strategies for Causal Inference

Part 0: Introduction

CAU Kiel
Summer term 2019

Dr. Martin Ademmer

martin.ademmer@ifw-kiel.de

1 / 18
General information Introduction: Causal inference

General information

2 / 18
General information Introduction: Causal inference

Dr. Martin Ademmer

Forecasting Center and Research Area Macroeconomic Policy
Kiel Institute for the World Economy (IfW)
martin.ademmer@ifw-kiel.de

3 / 18
General information Introduction: Causal inference

Aim of this course

• Providing an overview of a broad range of modern empirical

methods
• Discussing the respective advantages and disadvantages of
these methods
• Making a close connection to the recent economic literature

4 / 18
General information Introduction: Causal inference

Proceeding

• Research question and theoretical background

• Selection of suitable empirical approach
• Interpretation of findings, limitations of chosen method
• Discussion of seminal papers in this field
• Training with statistical software, replication exercises

5 / 18
General information Introduction: Causal inference

Overview and dates

Date Unit Economic topic Empirical method

26.04. 0 Introduction: Causal Inference
1 Health promotion in deve- Randomized Assignment
loping countries

10.05. 2 Minimum wages and em- Difference-in-Differences

ployment

24.05. 3 Institutions and economic Instrumental variables

development

07.06. 4 Causes and consequences Structural vector autore-

of oil price changes gressive model

tbd 5 Economic costs of conflict Synthetic control method

and nationalism

6 / 18
General information Introduction: Causal inference

Introduction: Causal inference

7 / 18
General information Introduction: Causal inference

Core readings

• World Bank (2016): Impact evaluation in practice, Chapters 1,

2, and 3.

8 / 18
General information Introduction: Causal inference

Three types of questions

• Descriptive questions
• Normative questions
• Cause-and-effect questions

9 / 18
General information Introduction: Causal inference

Cause-and-effect questions

What is the impact of a program/event/policy on an outcome of

interest?

Examples:
• What is the impact of a health insurance subsidy on
households’ health expenditures?
• What is the impact of changes in the minimum wage on
employment?
• What is the impact of institutions on economic performance?
• What is the impact of a change in oil prices on GDP and
consumer prices?
• What is the impact of the Brexit vote on output in the UK?

10 / 18
General information Introduction: Causal inference

How to answer them

To establish causality between a program and an outcome, we have

to rule out the possibility that any factors other than this program
explain the observed impact.

The impact or causal effect (∆) of a program (P) on an outcome

(Y ) is given by the difference in outcomes for the same unit
(person, country, etc.) with and without the program:

∆ = (Y |P = 1) − (Y |P = 0). (1)

Problem: How to observe the same unit in two different states at

the same time?

11 / 18
General information Introduction: Causal inference

The counterfactual problem

It is relatively straightforward to obtain (Y |P = 1), the outcome

with the program.
However, we cannot directly observe (Y |P = 0), i.e. what the
outcome would have been in the absence of the program.
We call (Y |P = 0) the counterfactual.

Since we cannot directly observe the counterfactual, we must

estimate it.

12 / 18
General information Introduction: Causal inference

The counterfactual problem (cont.)

13 / 18
General information Introduction: Causal inference

Estimating the counterfactual

Idea: Move from the unit level to the group level.

There exists no perfect clone for a single unit. But we can rely on
statistical properties to generate two groups of units that are
statistically indistinguishable from each other at the group level.
The group that participates in the program is called treatment
group with outcome (Y |P = 1).
The other group is called control group, which allows us to
estimate the counterfactual outcome (Y |P = 0).

14 / 18
General information Introduction: Causal inference

Estimating the counterfactual (cont.)

So in practice, the challenge is to find a valid control group.

A valid control group

1 has the same characteristics, on average, as the treatment
group in the absence of the program.
2 would react to the program in the same way as the treatment
group, if given the program.
3 is neither directly nor indirectly affected by the program.

If the control group is invalid, then the estimated impact will be

biased.

15 / 18
General information Introduction: Causal inference

Counterfeit estimates of the counterfactual

Two common but very problematic approaches:

• Before-and-after comparisons: Comparing the outcomes of the
same group before and after participating in the program.
• Enrolled-and-nonenrolled (or self-selected) comparisons:
Comparing the outcome of a group that has chosen to
participate in a program with the outcome of a group that has
chosen not to participate.

16 / 18
General information While opponents often broadly charge that raising the minimum wage “will cause job Introduction: Causal inference
losses,” such increases disproportionately affect a select few employment sectors. The bulk
of workers receiving raises as the result of minimum-wage increases are concentrated in a
group of service industries—the two largest being restaurants and retail. For that reason, we

Counterfeit estimates of the counterfactual (cont.)

examine employment trends, both overall and with a special focus on these indicator
industries in which any adverse impact resulting from a higher minimum wage would most
likely be evident.

Our findings are quite clear: in the nearly two dozen instances when the federal minimum
wage has been increased, employment the following year has increased in the substantial
majority of instances.

Source: National Employment Law Project (2016).

NELP | RAISE WAGES, KILL JOBS? | MAY 2016 5

17 / 18
General information Introduction: Causal inference

Counterfeit estimates of the counterfactual (cont.)

Examples of selection bias:

[to be completed in class]

18 / 18