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