The UK government\u2019s Coronavirus Job Retention Scheme (CJRS) was set up to safeguard jobs and incomes during the Covid-19 crisis by allowing employers to place workers on temporary leave rather than making them redundant. Was the scheme designed effectively and has it prevented widespread financial distress among UK households?<\/p>\n\n\n\n
During a spell on furlough, the government has paid part of a worker\u2019s wages up to a maximum amount. While employers have had discretion to pay the remaining salary, many have chosen not to. Furloughed individuals have had to compensate for the income shortfall by adjusting their spending patterns or drawing down savings. Unless these adjustments are sufficient to cover the entire income shortfall, being furloughed has imposed a risk of financial distress on households. Evidence suggests that the CJRS has had only a modest effect on increasing the incidence of financial distress.<\/p>\n\n\n\n
While the CJRS was introduced with the aim of protecting jobs and incomes, it also needs to remain financially sustainable. The overall cost of the CJRS imposes a substantial burden on the public finances: the government spent almost \u00a370 billion on the scheme to cover the wages of 11.6 million people.<\/p>\n\n\n\n
Recent research shows that the design of the scheme has been successful in the sense that it has mitigated a big rise in the number of households experiencing financial hardship at the lowest cost to taxpayers.<\/p>\n\n\n\n
The UK government introduced the furlough scheme in March 2020 and it comes to an end this month (September 2021). During this time, almost a quarter of the workforce has been furloughed at least once.<\/p>\n\n\n\n
Figure 1 shows that firms principally furloughed staff at the beginning of national lockdowns, as these were times of acute uncertainty about future business conditions<\/a>. In particular during these periods, it was unclear how long disruptions to supply chains would be, and how sales and workplace restrictions would affect firms\u2019 profit streams adversely.<\/p>\n\n\n\n Where firms have limited cash reserves or available credit, reducing the wage bill is an effective way to reduce costs and relax financial constraints<\/a>. While furloughing workers allows businesses to reduce operating costs, the policy also benefits workers by enabling them to retain their relationships with their employers, something that would not happen in the case of redundancy. This means that workers can return to work easily after furlough ends, and it allows firms to expand their activities quickly once business conditions improve by drawing from furloughed staff.<\/p>\n\n\n\n It is likely that the CJRS has prevented a substantial rise in the level of unemployment. The scheme had been an important stabilisation policy<\/a> during the pandemic by preventing large shortfalls in employees\u2019 incomes that would have occurred if they were it had been made redundant. Nevertheless, being furloughed implies a substantial reduction in a worker\u2019s income.<\/p>\n\n\n\nFigure 1: Number of furloughed employees<\/h4>\n\n\n