There’s an excellent little new humorous website called Spurious Correlations. Well, OK, humorous perhaps only to economics geeks but humorous all the same. And it’s a site that contains a deep and important lesson about economics (and the other social sciences of lesser importance of course). Which is that spurious correlations are indeed spurious.
Another way of putting much the same point is that correlation is not the same as causality and that’s something we get told all the time but unfortunately not all of us take the care to remember it.
For example, it is possible to show a correlation between the consumption of cheese in the US and the number of people who die by becoming tangled in their bedsheets. We could, I suppose, posit some causal connection by insisting that late night cheese consumption increase nightmares but there’s no actual evidence for that old wives’ tale anyway. Or perhaps that cheese consumption is connected to pizza consumption and that the extra anchovy consumption leads to people being strangled by their sheets? That’s not actually any more convincing, is it?
But the correlation is indeed there:
The entire blog is full of these sorts of correlations, all of which can be seen to be entirely spurious. The finest comic use of such correlations to date has been that mainstay of Pastafarianism. That climate change is caused by the absence of pirates. Well, why not? We didn’t used to have climate change and now we do and we did used to have pirates like Blackbeard and Edward Teach (unless they were the same person?) and now we don’t. So the correlation is there. But there’s no obvious or even possible hidden causality there so that correlation is indeed spurious.
The importance of this in economics is difficult to overstate. Take, for example, the Krueger/Card finding that a rise in the minimum wage leads to more minimum wage labour being hired. They did indeed find this correlation but everyone else in economics has been scratching their heads over how it happened. When you raise the price of something (other than a Giffen Good and no one is prepared to state that labour is a Giffen Good) then people buy less of it. So what’s different about labour, or what is it about this particular experiment that leads to this correlation?
My answer here (and I would stress that it is my answer, not something generally accepted) is that the mistake was in the design of the experiment. They looked at minimum wage labour in the fast food industry. But they only looked at the demand for labour in the chain restaurant part of the fast food industry. They entirely ignored the Mom and Pop part of it. And the chain part of that industry is the capital intensive part of it, the Mom and Pop part the labour intensive part. So, when the price of labour changes it’s entirely possible to construct a model in which the capital intensive part of the industry expands and the labour intensive part shrinks. Meaning that, if you look only at the capital intensive part then you’ll observe an expansion in the demand for labour while missing the possibly greater reduction in the demand for labour in the labour intensive part. That is, your correlation is spurious because you’re not measuring the whole effect.
Whether that’s right or wrong is another thing, something aside from the main point here. Which is simply that some very large number of correlations that we find are entirely spurious. And the way to work out which are not is to be able to work out a mechanism by which one will lead to the other. Absent that, and no one’s really managed to explain why a rise in the price of labour will lead to an increase in demand for it (no, the increase in aggregate demand isn’t a large enough effect), we need to look very much askance at most of the correlations we do find.