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Kenan-Flagler’s Ouimet: Opioid Epidemic Had Big Impact On Firms, Too

Paige Parker Ouimet of UNC’s Kenan-Flagler Business School is Poets&Quants’ Professor of the Week

The opioid epidemic that swept through America’s heartland has decimated families and caused death rates to soar. It has had huge impacts on the nation’s social fabric and politics, too.

Less well understood is how it’s affected the economy, though leading scholars like the late Alan Krueger, Anne Case, and Nobel laureate Angus Deaton, all of Princeton University, have done groundbreaking research in the field. 

Now a new study by Poets&Quants’ Professor of the Week, Paige Parker Ouimet, and two other colleagues from the UNC Kenan-Flagler Business School, for the first time tries to measure the impact of the opioid epidemic on businesses. 

Ouimet and her co-authors, assistant professor Elena Simintzi and PhD candidate Kailei Ye, found that labor shortages caused by opioid addiction had a negative effect on companies that had facilities in the areas most affected. 

Many firms increased their investment in technology to compensate for labor shortages. “We find that opioid abuse is associated with greater investment in IT, investment which likely reflects labor saving automation,” the authors write. “These results suggest that the opioid epidemic may have permanent negative effects on local labor markets.”

So, by reducing the labor force and prompting firms to automate rather than fill open jobs, the opioid epidemic may ironically only add to the job losses that contributed to excessive opioid use in the first place.

The most recent version of their working paper, “The Impact of the Opioid Crisis on Firm Value and Investment,” was published in March.  

Deaths involving opioids soared by more than 150% between 2007 and 2017, when 47,600 Americans died from overdoses, according to the National Institute on Drug Abuse. As of 2014, the federal government estimated, 2.5 million Americans were addicted to opioids, and the Centers for Disease Control and Prevention (CDC) calculates that the total economic burden of prescription opioid misuse alone is $78.3 billion a year. Krueger’s research found that opioid prescriptions can explain 20% of the decline in labor force participation the country saw since the Great Recession.

That turned out to be a key metric in the study by Ouimet and her colleagues as well. They used data provided by the CDC to track the numbers of prescriptions made for opioids, including fentanyl, codeine, oxycodone (Oxycontin), and hydrocordone (Vicodin) on the county level. They matched that with county-level data from the Bureau of Labor Statistics (BLS) on labor force participation and the unemployment rate and from the Census on median income for the people in the area. They got firm-level data from a private database.

The researchers ended up with some three million observations. The average establishment they looked at had $11.7 million in revenue and invested $203,000 in IT. They tracked the change in the rate of opioid prescriptions from 2006 to 2010 and the change in the labor participation rate from 2011 to 2014 and measured how that affected the firms they studied. 

“We document a negative and significant relation between the growth in historic opioid prescriptions at the county level and the change in labor force participation, supporting the argument that higher rates of opioid prescriptions negatively impacted the supply of workers,” they write.

“We also show that firms respond to labor shortages due to opioids by investing in automation technologies,” they continue. “The effect is concentrated in states hardest hit by the opioid crisis and firms that rely more on low skill labor. In effect, the firms are substituting capital for labor.”

One thing did help stem this tide, Ouimet and her co-authors report—the introduction of state laws that restricted opioid prescriptions. That, they found, boosted the share prices of publicly traded firms they studied that had previously invested little in technology. On average, those firms had a stock price gain of 0.5% to 0.6% after the new laws were announced. 

Ouimet, 43, associate professor of finance at UNC Kenan-Flagler, does research at the juncture of finance and labor economics. She focuses on income inequality, how financial decisions affect firm performance and employee stakeholders, and the impact of employee share ownership plans (ESOPs) and stock options on wages, productivity and turnover. She teaches classes in corporate finance.

Ouimet earned her BA at Dartmouth and her MBA and PhD at the Ross School of Business at the University of Michigan. She has taught at Kenan-Flagler for her entire academic career.

About The Author

Howard R. Gold is a contributing writer to Poets&Quants and a columnist for MarketWatch. His writing has appeared in Forbes, Barron’s, Money & USAToday. Follow on Twitter @howardrgold.