In March 2020, the UK government introduced a Coronavirus Job Retention Scheme. Businesses that had to close or cut back could put staff on furlough and the scheme would allow employers to claim 80% of workers’ wages up to £2500 per month. This would be passed on to workers.
There was large-scale uptake of the scheme. By the end of August, 9.6 million employees were on furlough (28% of the workforce) from around 1.2 million employers (61% of eligible employers). The scheme significantly stemmed the rise in unemployment. The claimant count rose 121% from March to August from 1.24 million to 2.74 million, far less than it would have done without the furlough scheme.
Since 1 August the level of support has been reduced in stages and is due to end on 31 October. It will then be replaced by a new ‘Job Support Scheme (JSS)‘ running from 1 November 2020 to 30 April 2021. Initially, employees must work at least 33% of their usual hours. For hours not worked, the government and the employer will pay a third each. There would be no pay for the final third. This means that an employee would receive at least 77.7% (33% + (2/3)67%) of their full pay – not far short of the 80% under the furlough scheme.
Effects on unemployment
Will the scheme see a substantial rise in unemployment, or will it be enough to support a gradual recovery in the economy as more businesses are able to reopen or take on more staff?
On first sight, it might seem that the scheme will give only slightly less job protection than the job furlough scheme with employees receiving only a little less than before. But, unlike the previous scheme, employers will have to pay not only for work done, but also an additional one-third for work not done. This is likely to encourage employers to lay off part of their staff and employ the remainder for more than one-third of their usual hours. Other firms may simply not engage with the scheme.
What is more, the furlough scheme paid wages for those previously employed by firms that were now closed. Under the new scheme, employees of firms that are forced to stay closed, such as many in the entertainments industry, will receive nothing. They will lose their jobs (at least until such firms are able to reopen) and will thus probably have to look for a new job. The scheme does not support them.
The government acknowledges that some people will lose their jobs but argues that it should not support jobs that are no longer viable. The question here is whether some jobs will eventually become viable again when the Covid restrictions are lifted.
With Covid cases on the rise again and more restrictions being imposed, especially at a local level, it seems inevitable that unemployment will continue to rise for some time with the ending of the furlough scheme and as the demand for labour remains subdued. The ending of the new scheme in April could compound the problem. Even when unemployment does begin to fall, it may take many months to return to pre-pandemic levels.
Update: expansion of the scheme
On 9 October, with Covid-19 cases rising rapidly in some parts of the country and tighter restrictions being imposed, the government announced that it was extending the scheme. From 1 November, employees of firms in certain parts of the country that would be required to close by the government, such as bars and restaurants, would be paid two-thirds of their previous wages by the government.
Critics of this extension to the scheme argue many firms will still be forced to shut because of lack of demand, even though they are not legally being required close. Employees of such firms will receive nothing from the scheme and will be forced onto Universal Credit. Also, the scheme will mean that many of the workers who do receive the money from the government will still face considerable hardship. Many will previously have been on minimum wages and thus will struggle to manage on only two-thirds of their previous wages.
- Job Support Scheme: What will I be paid after furlough?
BBC News, Eleanor Lawrie (1/10/20)
- Chancellor unveils new Job Support Scheme and extends self-employed grant
MSE News, Callum Mason (24/9/20)
- Sunak has bought himself time, but his big test will come as crisis eases
IFS Newspaper article, Paul Johnson (28/9/20)
- The businesses that feel left behind by Sunak’s jobs support scheme
Channel 4 News, Paul McNamara (25/9/20
- Covid: Jobs scheme ‘won’t stop major rise in unemployment’
BBC News (25/9/20)
- How the new Job Support Scheme will work
FT Adviser, Richard Churchill (30/9/20)
- Covid scheme: UK government to cover 22% of worker pay for six months
The Guardian, Phillip Inman (24/9/20)
- Hard winter ahead as Sunak tries to stop job losses hitting postwar record
The Guardian, Larry Elliott (24/9/20)
- Job Support Scheme ‘won’t reduce job losses’
Personnel Today, Ashleigh Webber (25/9/20)
- Sunak’s new job support scheme offers warm words but no escape from the coming unemployment chill
The Conversation, David Spencer (24/9/20)
- If people on furlough were counted as unemployed, find out what would have happened to the unemployment rate between March and August 2020.
- If an employer were previously employing two people doing the same type of job and now has enough work for only one person, under the Job Support Scheme would it be in the employers’ financial interest to employ one worker full time and make the other redundant or employ both of the workers half time? Explain your arguments.
- What are the arguments for and against the government supporting jobs for more than a few months?
- What determines the mobility of labour? What policies could the government pursue to increase labour mobility?
- Find out what policies to support employment or wages have been pursued by two other countries since the start of the pandemic. Compare them with the policies of the UK government.
Boris Johnson gave a speech on 30 June outlining his government’s approach to recovery from the sharpest recession on record. With the slogan ‘Build, build, build’, he said that infrastructure projects were the key to stimulating the economy. Infrastructure spending is a classic Keynesian response to recession as it stimulates aggregate demand allowing slack to be taken up, while also boosting aggregate supply, thereby allowing recovery in output while increasing potential national income.
A new ‘New deal’
He likened his approach to that of President Franklin D Roosevelt’s New Deal. This was a huge stimulus between 1933 and 1939 in an attempt to lift the US economy out of the Great Depression. There was a massive programme of government spending on construction projects, such as hospitals, schools, roads, bridges and dams, including the Hoover Dam and completing the 113-mile Overseas Highway connecting mainland Florida to the Florida Keys. Altogether, there were 34 599 projects, many large-scale. In addition, support was provided for people on low incomes, the unemployed, the elderly and farmers. Money supply was expanded, made possible by leaving the Gold Standard in 1934.
There was some debate as to whether the New Deal could be classed as ‘Keynesian’. Officially, the administration was concerned to achieve a balanced budget. However, it had a separate ’emergency budget’, from which New Deal spending was financed. According to estimates by the Federal Reserve Bank of St Louis, the total extra spending amounted to nearly 40% of US GDP as it was in 1929.
By comparison with the New Deal, the proposals of the Johnson government are extremely modest. Mostly it amounts to bringing forward spending already committed. The total of £5 billion is just 0.2% of current UK GDP.
Focusing on jobs
A recent report published by the Resolution Foundation, titled ‘The Full Monty‘, argues that as the Job Retention Scheme, under which people have been furloughed on 80% pay, is withdrawn, so unemployment is set to rise dramatically. The claimant count has already risen from 1.2m to 2.8m between March and May with the furlough scheme in place.
Policy should thus focus on job creation, especially in those sectors likely to experience the largest rise in unemployment. Such sectors include non-food retail, hospitality (pubs, restaurants, hotels, etc.), public transport, the arts, entertainment and leisure and a range of industries servicing these sectors. What is more, many of the people working in these sectors are young and low paid. Many will find it difficult to move to jobs elsewhere – partly because of a lack of qualifications and partly because of a lack of alternative jobs. The rising unemployment will raise inequality.
The Resolution Foundation report argues that policy should be focused specifically on job creation.
Policy makers should act now to minimise outflows from the hard-hit sectors – a wage subsidy scheme or a National Insurance cut in those sectors would reduce labour costs and discourage redundancies. Alongside this, the Government must pursue radical action to create jobs across the country, such as in social care and housing retrofitting, and ramp up support for the unemployed.
Dealing with hyteresis
The economy is set to recover somewhat as the lockdown is eased, but it is not expected to return to the situation before the pandemic. Many jobs will be lost permanently unless government support continues.
Even then, many firms will have closed and others will have reassessed how many workers they need to employ and whether less labour-intensive methods would be more profitable. They may take the opportunity to consider whether technology, such as AI, can replace labour; or they may prefer to employ cheap telecommuters from India or the Philippines rather than workers coming into the office.
Policies to stimulate recovery will need to take these hysteresis effects into account if unemployment is to fall back to pre-Covid rates.
- Coronavirus: Boris Johnson pledges ‘new deal’ to build post-virus
BBC News (30/6/20)
- Boris Johnson hails his economic plan as a new ‘New Deal.’ Try ‘small deal’ instead
MarketWatch, Pierre Briançon (30/6/20)
- Boris Johnson announces state-led post-coronavirus relaunch
Financial Times, George Parker, Jim Pickard and Chris Giles (30/6/20)
- How does Boris Johnson’s ‘new deal’ compare with Franklin D Roosevelt’s?
The Guardian, Richard Partington (30/6/20)
- Coronavirus: Ministers urged to stave off ‘second wave’ of unemployment with major job creation plan
PoliticsHome, Matt Honeycombe-Foster (29/6/20)
- Biggest job creation package in peacetime needed to deflect increase in UK unemployment, think tank reports
Independent, Alan Jones (29/6/20)
- UK needs ‘biggest-ever peacetime job creation plan’ to stop mass unemployment
The Guardian, Richard Partington (29/6/20)
- The International Labour Organization was founded after the Spanish flu – its past lights the path to a better future of work
The Conversation, Huw Thomas, Frederick Harry Pitts and Peter Turnbull (17/6/20)
- Seven charts on the coronavirus jobs market
BBC News, By Lora Jones and Daniele Palumbo (16/6/20)
- Covid, hysteresis, and the future of work
Vox, Richard Baldwin (29/5/20)
- The economy won’t snap back after Covid-19
Financial Times, Tim Harford (5/6/20)
- Addressing The Covid-19 Shock -Keeping People In Work And Businesses Afloat
Forbes, Linda Yueh (20/3/20)
- Cutting labour taxes brings back the jobs lost to COVID-19
Vox, Christian Bredemeier, Falko Juessen and Roland Winkler (28/6/20)
- What are the arguments for and against substantial increased government expenditure on infrastructure projects?
- Should the UK government spend more or less on such projects than the amount already pledged? Justify your answer.
- What are the arguments for and against directing all extra government expenditure towards green projects?
- Look through the Resolution Foundation report and summarise the findings of each of its sections.
- What are the arguments for and against directing all extra government expenditure towards those sectors where there is the highest rate of job losses?
- What form could policies to protect employment take?
- How should the success of policies to generate employment be measured?
- What form does hysteresis play on the post-Covid-19 labour market? What four shocks mean that employment will not simply return to the pre-Covid situation?
Figures for employment and unemployment give an incomplete picture of the state of the labour market. Just because a person is employed, that does not mean that they are working the number of hours they would like.
Some people would like to work more hours, either by working more hours in their current job, or by switching to an alternative job with more hours or by taking on an additional part-time job. Such people are classed as ‘underemployed’. On average, underemployed workers wanted to work an additional 11.3 hours per week in 2014 Q2. Underemployment is a measure of slack in the labour market, but it is not picked up in the unemployment statistics.
Other people would like to work fewer hours (at the same hourly rate), but feel they have no choice – usually because their employer demands that they work long hours. Some, however, would like to change to another job with fewer hours even if it involved less pay. People willing to sacrifice pay in order to work fewer hours are classed as ‘overemployed’.
Statistics released by the Office for National Statistics show that, in April to June 2014, 9.9%, or 3.0 million, workers in the UK were underemployed; and 9.7%, or 2.9 million, were overemployed.
The figures for underemployment vary between different groups:
||11.0% of female workers
||8.9% of male workers
||19.6% of 16-24 year olds
||9.9% of all workers
||21.1% of people in elementary occupations (e.g. cleaners, shop assistants and security guards)
||5.4% of people in professional occupations (e.g. doctors, teachers and accountants)
||11.5% of people in the North East of England (in 2013)
||9.2% of people in the East of England (in 2013)
||22.1% of part-time workers
||5.4% of full-time workers
As far as the overemployed are concerned, professional people and older people are more likely want shorter hours
The ONS data also show how under- and overemployment have changed over time: see chart (click here for a PowerPoint). Before the financial crisis and recession, overemployment exceeded underemployment. After the crisis, the position reversed: underemployment rose from 6.8% in 2007 to a peak of 10.8% in mid-2012; while overemployment fell from 10.5% in 2007 to a trough of 8.8% in early 2013.
More recently, as the economy has grown more strongly, underemployment has fallen back to 9.9% (in 2014 Q2) and overemployment has risen to 9.7%, virtually closing the gap between the two.
The fact that there is still significant underemployment suggests that there is still considerable slack in the labour market and that this may be acting as a brake on wage increases. On the other hand, the large numbers of people who consider themselves overemployed, especially among the professions and older workers, suggests that many people feel that they have not got the right work–life balance and many may be suffering consequent high levels of stress.
Rise in number of UK workers who want to cut back hours, ONS says The Guardian, Phillip Inman (25/11/14)
Data reveal slack and stretch in UK workforce Financial Times, Sarah O’Connor (25/11/14)
Will you graduate into underemployment? The Guardian, Jade Grassby (30/9/14)
Three million people would take pay cut to work shorter hours: Number who say they feel overworked rises by 10 per cent in one year Mail Online, Louise Eccles (26/11/14)
ONS: Rate of under-employment in Scotland lower than UK average Daily Record, Scott McCulloch (25/11/14)
Underemployment and Overemployment in the UK, 2014 ONS (25/11/14)
- Distinguish between unemployment (labour force survey (LFS) measure), unemployment (claimant count measure), underemployment (UK measure), underemployment (Eurostat measure) and disguised unemployment.
- Why is underemployment much higher amongst part-time workers than full-time workers?
- How do (a) underemployment and (b) overemployment vary according to the type of occupation? What explanations are there for the differences?
- Is the percentage of underemployment a good indicator of the degree of slack in the economy? Explain.
- How is the rise in zero hours contracts likely to have affected underemployment?
- How could the problem of overemployment be tackled? Would it be a good idea to pass a law setting a maximum number of hours per week that people can be required to do in a job?
- Would flexible working rights be a good idea?
First the good news. Employment is rising and unemployment is falling. Both claimant count rates and Labour Force Survey rates are down. Compared with a year ago, employment is up 279,092 to 29,869,489; LFS unemployment is down from 7.87% to 7.69%; and the claimant count rate is down from 4.7% to 4.0%.
Now the bad news. Even though more people are in employment, real wages have fallen. In other words, nominal wages have risen less fast than prices. Since 2009, real wages have fallen by 7.6% and have continued to fall throughout this period. The first chart illustrates this. It shows average weekly wage rates in 2005 prices. (Click here for a PowerPoint of the chart.)
The fall in real wages is an average for the whole country. Many people, especially those on low incomes, have seen their real wages fall much faster than the average. For many there is a real ‘cost of living’ crisis.
But why have real wages fallen despite the rise in employment? The answer is that output per hour worked has declined. This is illustrated in the second chart, which compares UK output per worker with that of other G7 countries. UK productivity has fallen both absolutely and relative to other G7 countries, most of which have had higher rates of investment.
The falling productivity in the UK requires more people to be employed to produce the same level of output. Part of what seems to be happening is that many employers have been prepared to keep workers on in return for lower real wages, even if demand from their customers is falling. And many workers have been prepared to accept real wage cuts in return for keeping their jobs.
Another part of the explanation is that the jobs that have been created have been largely in low-skilled, low-wage sectors of the economy, such as retailing and other parts of the service sector.
But falling productivity is only part of the reason for falling real wages. The other part is rising prices. A number of factors have contributed to this. These include a depreciation of the exchange rate back in 2008, the effects of which took some time to filter through into higher prices in the shops; a large rise in various commodity prices; and a rise in VAT and various other administered prices.
So what is the answer to falling real wages? The articles below consider the problem and some of the possible policy alternatives.
Inflation, unemployment and UK ‘misery’ BBC News, Linda Yueh (16/10/13)
Employment is growing, but so are the wage slaves The Guardian, Larry Elliott (16/10/13)
Living standards – going down and, er, up BBC News, Nick Robinson (26/7/13)
Revealed: The cost of living is rising faster in the UK than anywhere in Europe, with soaring food and energy bills blamed Mail Online, Matt Chorley (16/10/13)
Cutting prices to raise living standards is just a waste of energy The Telegraph, Roger Bootle (6/10/13)
Downturn sees average real wages collapse to a record low Independent, Ben Chu (17/10/13)
Why living standards and public finances matter Financial Times, Gavin Kelly (29/9/13)
Social Mobility Tsar Alan Milburn Calls on Government to Boost Wages to End UK Child Poverty International Business Times, Ian Silvera (17/10/13)
Do incorrect employment growth figures explain low UK productivity? The Guardian, Katie Allen (23/10/13)
Unemployment data ONS
Average Weekly Earnings dataset ONS
Consumer Prices Index ONS
International Comparison of Productivity ONS
- How are real wages measured?
- Why have real wage rates fallen in the UK since 2009?
- What factors should be included when measuring living standards?
- Why has employment risen and unemployment fallen over the past two years?
- What factors could lead to a rise in real wages in the future?
- What government policies could be adopted to raise real wages?
- Assess these policies in terms of their likely short-term success and long-term sustainability.