The Government’s Furlough Scheme May Be an Albatross Around the UK’s Neck

May 7, 2020 • Commentary
This article appeared on UK Telegraph on May 7, 2020.

It is easy to become immune to shock when it comes to virus‐​related statistics. The US, for example, still faces a Covid‐​19 death toll similar to 9/11 every day or two, while the UK suffers the equivalent of two Lockerbie bombings or more every 24 hours. Yet we become accustomed to the devastation.

One jarring economic number, however, has been the ratcheting unemployment figure in the US. Every Thursday, new claims are announced, with all the depressing inevitability of a medieval plague bell ringer. In the past seven weeks, 33.5 million people have filed initial claims for unemployment insurance. That’s vastly more than the entire population of Australia and over 20pc of the US workforce.

As this unemployment toll gets added to, week after week, it’s tempting to see it as vindication for the UK Government’s Coronavirus Job Retention Scheme. This “furlough scheme” aims to protect relationships between employers and employees to bridge to a “back to the future recovery”, rather than letting them perish, as in America.

Yet as the scale of this economic crisis becomes clear, I wonder whether the UK’s approach will bring with it major downsides in the longer term. Headline unemployment numbers, in isolation, could be highly misleading in regard to the full impact of this crisis on jobs and so the optimal response.

Consider the policies adopted. Both the US federal government and the UK Government recognised that Covid‐​19 would lead to unprecedented layoffs.

To prevent that, the Conservatives committed to subsidies equivalent to 80pc of furloughed employees’ wages, as well as covering their employer national insurance and auto‐​enrolment pension contributions. The aim was to maintain ties between businesses and their workers while demand for the firms’ products was absent or they were mandated shut.

The US took a different tack. Yes, its government offers small businesses loans that can be written off if bosses maintain jobs and spend the vast majority on payroll. But the key support mechanism was targeted at the workers affected, through a huge expansion in jobless insurance.

For those eligible and laid off due to Covid‐​19, a flat rate of $600 (£490) per week was granted on top of ordinary benefits recipients could obtain for four months, making unemployment more financially rewarding than work for many Americans.

The US, in other words, subsidised unemployment. The UK subsidised maintaining employment relationships. This is a key reason why the US numbers look dreadful. But underlying them is a similar economic shock. While the US has a real‐​time unemployment rate well above 20pc, between 80pc and 90pc of newly unemployed workers surveyed think they will return to their old jobs.

In the UK, 6.3 million employees are seeing wages funded via Chancellor Rishi Sunak’s furlough scheme – a very similar 23pc of the labour force. Which approach will facilitate the stronger jobs recovery? If the pandemic ended rapidly and behaviour returned to “normal”, the UK approach would be superior. The scheme could be wound down quickly. Workers’ relationships from March 2020 would remain.

And, because of the sheer near‐​term generosity of the US unemployment benefits, American firms would find it more difficult to rehire immediately. Unemployment there would be much stickier.

With each passing day, however, that scenario looks less likely. Economists Nick Bloom, Jose Barrero and Stephen Davis, analysing detailed business surveys, believe 42pc of recent US layoffs will be permanent as we learn to live with the virus. The Institute for Fiscal Studies here has shown that 80pc of workers in the accommodation and food services sector, and 68pc in entertainment and arts industries, have been furloughed. Even when lockdowns are relaxed, social distancing will constrain these industries. Many businesses will face both sustained depressions of demand and the cost burdens of adopting new safety protocols.

In this environment, lots of firms that received taxpayer subsidy will go bust or lay off workers. What’s more, this would be efficient — we do not want zombie companies. Yet having implicitly promised to protect jobs and businesses, it will be difficult for the UK Government to pivot to allow widespread layoffs.

Already, the Chancellor has faced criticism for plans to reduce the generosity of the furlough subsidies. Even if he faced that down, the retention scheme could simply be masking a big rise in unemployment, requiring a rapid build‐​up of new or existing programmes, and a significant delay in the jobs recovery.

America’s approach, on the other hand, set fewer expectations for preserving the jobs of March 2020. The newly unemployed might still think their old jobs will return. But if they do not, the economic link is less strong, and they find themselves in a programme that policymakers can tinker with, not least altering its generosity. The approach, in the longer term, looks more flexible. It will lead to a more rapid reallocation of workers if Bloom, Barrero and Davis are correct.

That reallocation of workers would be painful in either country. Periods where the supply and demand for skills are mismatched are economically costly. “Active labour market policies” in the form of jobs clearing sites and retraining will likely be necessary.

But if this pandemic has changed our behaviour semi‐​permanently, then seeking to preserve the March 2020 economy will prove misguided.

Endeavouring to freeze the pre‐​pandemic jobs market could then fast become a political albatross, with a long economic hangover.

About the Author
Ryan Bourne

R. Evan Scharf Chair for the Public Understanding of Economics