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End of the furlough scheme could cost the UK economy 1.8 million jobs

Covid 19 4

The end of the furlough scheme could cost the UK economy 1.8 million jobs, according to a new study by Professor Matteo Richiardi, Director of the new Centre for Microsimulation and Policy Analysis at ISER. In a new blog post Professor Richiardi urges the Chancellor to re-think the sudden end of the Job Retention Scheme.

'’Instead, tapering out of the scheme should be rethought, alongside investing in the recovery should be the new mantra for the Government in a post-Covid, low-interest rates world.

The Job Retention Scheme, together with the other emergency measures put forward by the Government, have been very effective in shielding millions of workers from the worst crisis in centuries. In a study conducted in April-May, a team of researchers at the Centre for Microsimulation and Policy Analysis at the University of Essex predicted that the economy would shrink by 22.5% in full lock-down. When, two months later, the ONS released the GDP figures for April, they showed a remarkably close contraction of -20%. Using the same model we estimate that the termination of the Job Retention Scheme would imply an increase in unemployment of 1.5 million workers with respect to the pre-crisis level, or an additional burden of about half a million unemployed with respect to the current level. The end of the Self-employment Income Support Scheme would cause an additional 300,000 job losses.

The termination of the Job Retention Scheme is not a good idea because the crisis does not come with an end date: similarly, an end date should not be put on the policy response. Rather, the JRS should be gradually reduced, so that furloughed workers have an increasing incentive to look for other alternatives while their chances to go back to their previous job grow smaller. This is the first side of the coin. The scheme is indeed becoming less generous, but this affects only firms, not workers. From the beginning of August, the Government still pays 80% of the previous wages with a cap at £2,500, but firms have to pay employer NICs and pension contributions. From September, the Government will pay 70%, and firms will have to add up the remaining 10%. From October, the Government contribution will go down to 60%, and firms will have to top up the remaining 20%. However, workers will still continue to receive 80% of their previous wages throughout the period. While this gives firms an increasing incentive to dismiss workers if they believe they won’t be able to recall them, workers will still feel supported, until the moment when they will lose everything. A better scheme would maintain firms’ contributions at a low level, say at 10%, while reducing the Government contribution to 70% in September, 60% in October, 50% in November, and 40% in December. From January 2021 onwards the Government contribution should remain at 40%, leaving workers still furloughed with half the level of their previous wages. This is a significant support while they actively look for new opportunities, at an extremely difficult time.

Simultaneously however, the Government should actively create new opportunities, the second side of the coin. Smart policies can at the same time help firms, workers, the economy and the broader society. Universities and more generally the education sector, for instance, are doing particularly bad because student enrolment is low. There is not a better time for the Government to offer an education fee waiver. This would create an incentive to young and less young individuals to undertake training or re-training, help the education sector, improve future productivity and competitiveness, and increase the level of human capital in society, four birds with one stone. Also, given that the Government will have to pay one way or another for those losing their jobs, both through increased benefit payments and reduced tax revenues, why not using the same money for creating new jobs in the Green economy, for instance by increasing the levels of subsidies for renewables and energy efficiency? At two birds with one stone this still looks attractive. We need to move out of the pre-Covid world, and into the future. Abandoning furloughed workers with no prospects for the future will only make the crisis worse. ‘’

Matteo Richiardi, Cambridge, 10 August 2020