What is in store for the post-furlough British labour market?
The furlough scheme has been extended indefinitely since the declaration of a second national lockdown in the United Kingdom, assuaging concerns of a sudden rise in unemployment. Eventually, however, the UK will have to confront the reality that not all jobs can be saved. This article assesses the prospects for the impending post-furlough labour market, and shows that amidst all the struggle, a few silver linings may emerge.
The contrast in mood between Chancellor Rishi Sunak’s address to the public in March, when he announced the furlough scheme, and his recent September conference setting forth the new Job Support Scheme as its replacement, couldn’t have been more stark. In spite of the forthcoming first wave of COVID-19 infections, there was a cautious sense of optimism founded on the belief that things would get back to normal by summer, combined with the reassurance provided by the furlough scheme to support struggling workers and firms. Fast forward a few months and what were previously reasons for optimism are now causes for concern; the fanciful assumption that the pandemic would subside by the end of the year has been discredited, and the furlough scheme came to an end at the start of November.
Naturally, reaching any firm conclusions on the effectiveness of the scheme is difficult given that the pandemic is still ongoing. Nevertheless, what we can say with certainty is that, in order to be as effective as possible, the policy response should target those groups most at risk of job loss, wage scarring, and general hardship. If done correctly, we can emerge from the pandemic with a fairer, more robust labour market than we would have ever thought was possible. Understandably, Sunak and the government have little control over the global progression of the virus. What they can control, however, is how to respond to the challenges posed by the pandemic and, above all, support those in need.
Sunak’s announcement was met with mixed approval from economists and laymen alike. Previously, the furlough scheme covered 80% of an employee’s wages up to £2500 a month, in addition to a host of other measures such as facilitating access to cheap credit for struggling firms and providing incentives for firms to retain workers rather than lay them off. In contrast, the new scheme set to kick in on the 1st of November planned to cover only 22% of an employee’s monthly wage. Persuaded by the wave of criticism, Sunak has since acknowledged the increasingly dire outlook for the economy and subsequently announced modifications to the Job Support Scheme. Altogether, his newest proposal reduces the burden on firms to pay workers’ wages, and offers greater support for self-employed workers and firms affected by local lockdowns. Significantly, however, only “viable” jobs are suitable for this scheme. The Chancellor failed to specify what he meant by “viable” but clearly, experts expect this scheme to be far more exclusive and restrictive. Estimates show that the new scheme will only cover 2 to 5 million jobs, down from the 9 million jobs supported by the furlough scheme at its peak.
The Bank of England subsequently revised its unemployment forecasts to 7.5% by the end of the year, a significant increase from the current rate of 4.1%. Similarly, a survey of CFOs of major companies in the UK found that unemployment expectations have worsened dramatically to near-financial crisis levels. Although this would appear to reflect negatively on the newly proposed scheme, the truth is not so clear-cut. Andy Haldane, chief economist at the Bank of England, argues that extending the furlough scheme would have been effectively delaying the inevitable. Though not explicitly mentioned as such, Haldane’s concerns can be boiled down to the fear of “zombification.”
Although this term has been thrown around a lot of late, broadly speaking, “zombification” represents an obstacle for creative destruction to take place. Creative destruction, as originally defined by Joseph Schumpeter, is an important concept which explains the dynamic — often disruptive — evolution of an economy over time. Firms that innovate and are quick to adapt to new technology, for instance, will reap the rewards of increased profits. On the other hand, firms that are stubborn or slow to adapt will be squeezed out of the green and into the red, effectively losing business until they go bust. The end for one firm, however, brings with it the potential for a new firm to take its place and, in theory, make better use of its resources to become more profitable. One of the main takeaways from creative destruction is the belief that, in order for an economy to allocate resources efficiently and thus grow, firms must be allowed to go bust just as easily as they go boom.
In our Covid-19 context, the perceived barrier to creative destruction is being erected by a plentiful menu of cheap credit and government business support. As a result, firms that were already struggling before the pandemic are not being allowed to fail. Moreover, as economies grow out of the pandemic, there is uncertainty about which firms will still be viable in a post-Covid society. At this point, you may be wondering why the government cannot simply support the firms which are struggling solely due to the pandemic and should recover when demand returns to pre-pandemic levels, and restrict aid to the ones that were unprofitable to begin with. Unfortunately, this is made difficult, impossible even, because we live in a world of incomplete information. Michael Spence was one of the first economists to identify this problem, but in a slightly different context; Spence detailed a hiring manager’s struggles to accurately assess a worker’s suitability for their firm. Economists call this a case of asymmetric information. To go back to our original situation, the government lacks the information necessary to differentiate the firms which are fundamentally profitable but struggling due to depressed demand from those which are, or are set to become, fundamentally unprofitable. The initial policy reaction was to provide blanket support to all firms, but as the pandemic continues to affect the economy, policymakers are starting to worry about the sustainability of this approach. In short, what economists like Haldane fear is that if fiscal and monetary policy continues to be loose and expansionary, the economy may not just experience a slow recovery in the short-run, but crucially, economic potential may be damaged in the medium- to long-run as well.
However, the subjectivity of economic forecasts combined with a limited supply of data means that perspectives are varied and diverse. Paul Krugman, for example, brushes aside concerns over “zombification” as “delusional”. The furlough scheme was necessary to break the multiplier effect that a demand shock of such magnitude would entail, he writes. Therefore, as long as demand remains below pre-pandemic levels, continued support for firms and workers will be necessary to keep the economy afloat. This difference in opinion can be explained by understanding how long economists anticipate the effects of the pandemic to last. Haldane’s prognosis reveals that he expects the fallout from the pandemic to last far longer than Krugman, who in May predicted a “morning in America”-esque recovery once lockdown had been lifted. The epidemiological evidence, for now, appears to side with Haldane’s narrative, and importantly for the British economy, Sunak agrees.
Does this mean that unemployment will increase no matter what? Yes, but with the right mix of policies, it could be both manageable and, potentially, good for the overall long-run health of the economy. To start, we should prioritise policies that target demographics who are most likely to be affected. ‘Policy in Practice’, a social policy analytics company, submitted evidence to the Department of Work and Pensions earlier this year emphasising the toll the pandemic has taken on young people and their employment prospects. Their report finds that 16–24 year olds are experiencing the biggest decrease in employment out of all the other age groups, and the fastest decrease since 2009. A significant reason behind the heightened plight of young workers is that young people are more likely to find themselves working in the industries and sectors which have been hit hardest by the pandemic, such as hospitality. Moreover, the Prince’s Trust, a charity for vulnerable young people, surveyed 2000 of them and found that 41% believe their future goals are “impossible to achieve”, with this figure rising to 50% for young people from poorer backgrounds. Their fears are not misplaced; the Resolution Foundation reports that millennials who entered the labour market during and immediately after the financial crisis experienced “scarring” effects on their wages. In other words, entering the labour market at a time of crisis can set young people on a path of lower earnings, and thus lower standards of living than their more fortunate cohort counterparts.
Consequently, facilitating labour market access for young people to enter more secure employment should rank high on the list of policy priorities. This can be done, for instance, by removing financial barriers to apprenticeships; Policy in Practice reports that households enrolled in Universal Credit are actually penalised if their child joins an apprenticeship scheme because apprentices are no longer considered children. Paired with the fact that the monthly national minimum wage for apprenticeships is lower than the compensation paid by Universal Credit, it is no surprise that households elect to stay away from such schemes. Although just one example, it demonstrates that the effects of the pandemic can be leveraged to push forward genuine, long-needed change. Not to mention the opportunities for a restructuring of the economy to prioritise environmentally friendly practices and initiatives. Green New Deal, anyone?
In their seminal work, Why Nations Fail, Acemoglu and Robinson frequently refer to “critical junctures”, or “major events that disrupt the existing political and economic balance in one or many societies”. These events, they argue, launch societies on different paths. Some towards prosperity, others to hardship. It is difficult to argue against the idea that the pandemic is one such critical juncture. Time will tell whether we can make the most of it.
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