the big short was a fantastic movie, for finance nerds and regular viewers alike.
One of the lines that stood out the most, amongst many memorable lines, was the claim
that for every 1% increase in unemployment 40,000 people die.
This is an incredibly significant claim, that adds even more weight to the already significant
societal issues that come along with people out of the job.
What makes this even more relevant is that today many governments around the world are
making tough decisions between the health of their citizens and the economic prosperity
of their nation.
If this claim of 40,000 deaths per 1% unemployment is to be believed then these governments may
very well be damned if they do, and damned if they don’t.
So is this claim actually true? Or is it just the work of Hollywood fiction trying to raise
the stakes?
How is it that these deaths are actually caused?
And is this statistic only true for the United States, or does it happen more or less in
countries with stronger social welfare?
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Becoming unemployed either by getting fired or being made redundant is never a positive
experience on an individual level.
Getting fired means you have to live with the idea that you were not good enough for
the job that you had, and being made redundant means that you are often going out into an
economic downturn with very little job opportunities.
In either case it’s going to be hard to find a new job to maintain your quality of
life.
But is this all backed up by
the numbers
Do 40,000 people actually die for every 1% increase in unemployment? Well, no, the actual
number Brad Pitt should have quoted here is 37,000.
Now, of course, this is being pedantic over what is basically a rounding error, but the
actual study he is most likely referring to is the 1981 publication, “Corporate Flight:
The Causes and Consequences of Economic Dislocation”
This was a book authored by Bennett Harrison and Barry Bluestone. Two American economists
who were actually writing about the impacts of outsourcing labor to cheaper manufacturing
centers around the world.
They noted that long term structural unemployment caused an early demise in a variety of ways.
The main killer was heart disease, where unemployment was said to cause 20,000 deaths that wouldnt
have otherwise happened due to increased stress, and limited access to healthcare that normally
came with regular employment.
Another major component was a spike in substance abuse, particularly drinking that people will
turn to, to deal with the pressures of being unemployed.
The others were issues like suicides and homicides that were also shown to have a strong correlation
with unemployment.
There was all of this plus a collection of smaller factors that all added up to the 37,000
death figure.
Now this all sounds logical, any issue as stressful as unemployment, over a large enough
sample size, will have some casualties, but 37,000 sounds… pretty extreme.
It also sounds like this study is in direct contradiction to a more recent study, titled
Losing Life and Livelihood: A Systematic Review and Meta-Analysis of Unemployment and All-Cause
Mortality
Which sounds, just, thrilling…
This is actually a medical study published by, the US national Library of Medicine, and
authored by those other kinds of doctors, the type that can prescribe medication.
So a big disclaimer here is that a lot of the ins and out’s of this paper is lost
on regular economists, but the statistical figures are still relevant.
The study touches on many of the same risks factors as the 1981 book but notes everything
to a significantly lesser degree.
The conclusion of this particular study was that the risks of death increase by 63% when
people lose their jobs.
They never actually lay out the same equation that this much unemployment equals this much
death but we can extrapolate the same figures. The labor force in the USA is about 163 million
people, this means a 1% increase in unemployment will see 1.63 million people out on the street.
Now in a given year, people die, of anything, and everything it’s just one of those guarantees
in life.
From a group of 1.63 million people we actually expect that about 6,400 will die within a
given 12 month time frame.
If unemployment increases the risk of death by 63% that then takes this figure to around
10,400 people which is an increase of 4,000 people.
Still a significant figure, but it is an order of magnitude lower than the 40,000 quoted
here in the big short.
This is also not considering that the labor force in the usa in 1980 was only around 140
million people which would make this number even smaller still.
So what is going on here? Which study is correct?
Well actually both of them.
And they both manage to stay correct for 2 reasons.
The first is that the medical study was actually a meta-study of individuals.
What that means is that the medical researchers actually just looked at other studies and
recorded the data from people that had died.
If a hospital recorded figures around heart attacks and tracked if the victims were employed
or unemployed these researches would take those figures to put into their study.
But all of these data points only tracked the unemployed individuals.
So if for example, the husband of a stay at home mother lost his job, and that woman then
died through any of these factors we saw earlier, then that would not count in the medical study,
but it would count in the economic study hence the larger death toll.
The other big distinction is the time that this would all take, in the medical study
the researchers were exploring the likelihood of death over a given 12 month period.
The economics paper on the other hand was exploring this phenomenon over a non-specific
timeframe.
So if someone got fired, started stress eating and drinking while looking for a new job and
then happened to die a few years later of liver failure, then that would count on the
economic paper, but it may not count on the medical paper.
So now that the papers that likely served as the inspiration for the movie script are
understood,
What does this mean for
Todays economy
We have recently experienced the largest spike in unemployment ever.
By some estimates, the unemployment rate was hovering around 15% in the USA as of early
april.
This was a spike from the 3.5% unemployment rate the USA was enjoying before the economic
fallout of 2020 was felt.
This is an increase of over 11% in the unemployment rate, so are we really to expect 400,000 deaths
as a result of this? Well yes… but, this figure here is probably
unfair to add onto the pile.
Sure there is definitely a correlation, but its more so that these deaths are causing
the increasing unemployment, rather than unemployment causing these deaths. So for the sake of rigorous
econometrics, we will ignore this figure… for now.
Outside of that, can we still expect a sharp increase in all of these other nasty factors?
Well yes, but its not going to be nearly the 400,000 people the paper would suggest.
You see this paper was written in the 1980’s and it was written about the impacts of outsourcing,
not the impact of an economic recession.
If a factory is moved overseas then its not likely that those jobs are ever coming back,
this causes what is called Structural Unemployment.
Which is unemployment caused by people loosing their job through some kind of systematic
shift in the way business is done.
Factories being outsourced, truck drivers being automated or street lamplighters been
replaced by lightbulbs are all types of structural unemployment.
What we are experiencing at the moment, is a weird mixture of cyclical and structural
unemployment.
Cyclical unemployment is people losing their jobs due to unfavorable economic conditions.
In the fallout of the 2008 subprime mortgage crisis, nothing materially changed about industry
around the world. Nothing was outsourced, there wasn’t some new technology that made
a pool of workers obsolete, and there wasn’t some invisible threat that meant everybody
had to stay up.
People were losing their jobs because of the debt cycle.
This type of unemployment is still bad, but in aggregate these jobs tend to come back
over time.
This means people will be able to get back to work, and avoid the perils of becoming
hardcore unemployed.
Which is the worste type of unemployment, basically people who have resigned themselves
to never getting a job in their life, the same group that really pushes this 40,000
death figure.
Now a lot of the unemployment in 2020 is actually structural. But there is at least the hope
that things will eventually go back to normal once this all blows over.
Which means people will get back to work eventually and we won’t feel the same burden of long
term unemployment.
So this 40,000 deaths figure is not going to be true in 2020, and ironically it was
even less true in 2008, which is what the Big Short was focused on.
Now lets say we were to ignore current affairs, and just look at the impacts that something
like mass automation could have.
Is this paycheque or perish arrangement only true in the united states?
Paycheque or perish
Losing your job in the united states is very bad, you will of course lose your income,
but you will also lose easy access to healthcare all while going onto social security that
can be sketchy at best.
In contrast, there are nations like Sweden, and Denmark that have legendarily robust welfare,
and also nations that have nothing at all.
Now all the countries with no form of social security are either undeveloped or developing
economies, so it’s a bit unfair to really compare those statistics here.
As for the comparison between Denmark and the united states though there are some interesting
takeaways.
The first is that unfortunately, the same type of unemployment equals death study has
not been done in Denmark.
But, the nation has a lot less hardcore unemployed individuals because of the government support
for training and education, which alleviates a lot of the issues of structural unemployment
by letting people retrain from let’s say factory floor workers to IT specialists.
Since long term unemployment is where everything gets significantly worse economically and
socially, it is logical to assume that there would be less of a correlation between unemployment
and death in these nations.
Final thoughts
So was brad pitts ominous warning about the 2008 sub prime mortgage crisis true?
Well no.
That’s not to say it was some massive mistake though, in reality, the fallout of the housing
market collapse was extremely hard to predict. Exemplified by the fact that almost nobody
even saw it coming.
This doesn’t mean that this phenomenon doesnt happen though, and its every bit as relevant
as it was back in the 1980’s.
The impacts of unemployment can have a much deeper impact than poor growth figures. It
genuinely impacts peoples lives.
If nothing else is taken out of what was probably a throwaway line in a movie it’s that it
should never be overly difficult for an individual to get back into things and start contributing
once more.
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