Unending Furlough

By Benjamin Gregg

The Coronavirus Job Retention Scheme is due to end in September, fifteen months after it was supposed to. After three extensions, it is finally time to end it?

It is nine months since the Coronavirus Job Retention Scheme (CJRS), commonly known as furlough, was supposed to end. Last Wednesday, Rishi Sunak extended the scheme another six months, until September. Furlough has protected 11.2 million jobs^[i], so far, at a cost of £79.7 billion^[ii]. The spectre of unemployment haunts the government, so much so that the furlough scheme has already been extended three times. While previous attempts to end furlough were too soon, the Chancellor is right to end it in September.

Furlough was first announced on the 20^th of March 2020 to prevent mass unemployment resulting from lockdown. In this, it has undoubtedly been successful. The Office for Budget Responsibility (OBR), the government’s budget watchdog, predicted unemployment would peak at 12% at the end of 2020^[iii], instead it rose to only 5.1%^[iv]. Subsidising employees’ salaries, guaranteeing them 80% of their gross wages up to £2,500 per month, ensured companies cut hours, which fell 17.4%^[v], rather than workers.

The CJRS is not perfect. Indeed, it is less generous than similar schemes in Europe. Germany covers 67% of net wages up to €6,700 per month^[vi], while the UK paid 52% of people less than the minimum wage^[vii]. Flexible furlough, allowing people to work part time, was not introduced until July. 475,000 people have not worked for over six months while on furlough^[viii], losing the skills and confidence work grants. Still, the scheme has achieved its stated aim of stopping mass unemployment. The United States opted against a job retention scheme and suffered a surge in unemployment, from a similar level as the UK to 14.8% in April 2020^[ix].

Ending furlough in September will undoubtably lead to an increase unemployment, as forecasted by the OBR to reach a peak of 6.5%^[x]. Joblessness wrecks livelihoods and lives – it is associated with worsened mental wellbeing, lower confidence, and lost skills^[xi]. Mass unemployment in the 1980s, when over 3 million people were unemployed^[xii], still haunts politicians. Social unrest and cabinet revolts followed^[xiii]. The permanent scars left on former industrial towns supposedly drives the government’s “levelling up” agenda^[xiv]. Fears of another bout are evident in the use of 1980s economic turbulence becoming the media’s go-to reference for unemployment throughout the pandemic^[xv].

Yet the Chancellor is right to end furlough. The ugliest reason is cost-saving. By September, the scheme will have cost £107 billion^[xvi]. With the largest deficit in peacetime to pay down, furlough is an easy saving. For now, government borrowing is cheap, interest rates barely reach 1%^[xvii], and the deficit will fall as the economy recovers. But low interest rates are not guaranteed. If inflation picks up, which Andrew Bailey, the governor of the Bank of England, warned of this week^[xviii], borrowing costs will too. Alone, this miserly reason is not enough to justify stopping it, though it is likely the main one for the Chancellor^[xix].

The real reason to end furlough is that while it protects viable jobs from pandemic-induced destruction, it also protects unviable jobs. Some jobs will not return after the pandemic. Structural unemployment, unemployment caused by permanent changes in how an economy works, is estimated to be 5.5%^[xx], above the actual unemployment rate (a mismatch manufactured by furlough). Behavioural changes, like working from home and limited travel, means some jobs are no longer sustainable. For example, the pandemic accelerated the shift to less labour-intensive online shopping, permanently reducing viable retail work^[xxi].

Unviable jobs predate the pandemic too. Economic growth allows so-called “zombie” firms to escape failure, often by mistaken optimism providing funds to keep them afloat^[xxii]. A recession is like a forest fire that burns away dead wood and makes space for new growth. Zombie firms are unprepared for recession-induced credit tightening and slumps in demand, so will inevitably fail, releasing resources for better firms to take up. This process is often called “Creative Destruction”, a term coined by Joseph Schumpeter^[xxiii]. Furlough funds keep firms afloat regardless of viability, but slowing the destruction withholds the creativity.

Consider the United States again, where 4.4 million new businesses have formed since last March^[xxiv]. After many states ended their lockdowns early (a costly trade-off for loss of life), its unemployment rate more than halved, to 6.3%^[xxv], since peaking last April. Its economy is forecast to recover quicker than either the UK or Euro Area^[xxvi], having suffered a smaller recession to begin with.

Furlough was justified in the UK during lockdown when it was impossible to differentiate between viable firms closed by restrictions and zombie firms clinging to government generosity. By September, however, normality will likely return^[xxvii]. The UK has pent up demand from the pandemic. The savings rate reached 27% in the first lockdown, far above the historic rate of 6%^[xxviii]. Those funds will flood out when lockdown ends. Overextending furlough risks tying workers to firms outside the uptick. Firms shuttered by lockdowns will become viable again. Zombies should be allowed to die.

That is not to dismiss the damage unemployment wreaks. But extending an emergency measure indefinitely is not the answer. Support for the unemployed should come through the social security system. Unending furlough keeps people in unviable jobs while blocking the creative destruction necessary to create better ones. The funds wasted sustaining the scheme would be better spent investing to create new jobs, repairing the UK welfare state – which, as the least generous in Europe^[xxix], only Scrooge could be proud of^[xxx] – and upping the paltry £2.9 billion Restart scheme to retrain the jobless^[xxxi].

Just because Rishi Sunak is right to end furlough in September, does not mean he will. He tried before, and ended up extending it to October 2020, then April 2021, and now September 2021. Few governments want to raise unemployment. Furlough makes it worse by putting the unemployment rate directly under government diktat. The opposition already called for an indefinite extension^[xxxii] before the budget. Pressure will only build as September approaches. If the Chancellor wants to get his way, he should avoid the penny-pinching argument and argue for fixing the real failings in the UK labour market, rather than papering over them with another extension.

The views expressed in this article are the author’s own and may not reflect the opinions of the St Andrews Economist.

^[i] https://www.gov.uk/government/statistics/coronavirus-job-retention-scheme-statistics-february-2021

^[ii] OBR, Economic and Fiscal Outlook March 2021

^[iii] OBR, Fiscal Sustainability Report July 2020

^[iv] OBR, Economic and Fiscal Outlook March 2021

^[v] OBR, Economic and Fiscal Outlook March 2021

^[vi] https://www.theguardian.com/money/2020/may/12/how-the-uk-furlough-scheme-compares-with-other-countries

^[vii] https://neweconomics.org/2021/02/social-security-2010-comparison

^[viii] Resolution Foundation, Long Covid in the Labour Market

^[ix] https://data.oecd.org/unemp/unemployment-rate.htm

^[x] OBR, Economic and Fiscal Outlook March 2021

^[xi] Resolution Foundation, Long Covid in the Labour Market