Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

What kind of government support might replace the UK’s job furlough scheme?

Furlough ends in September. What will happen to the millions of workers still on the scheme, especially those who are not recalled by their employer? What kind of support – in cash and job search assistance – is the government providing?

At the end of March 2021, there were still around 4.2 million jobs furloughed in the UK. Many of these employees will have since been recalled by their employers as pubs, restaurants and venues have begun to re-open. Others will be brought back over the coming months as further restrictions lift. But some will not have a job to go back to.

While this will be difficult for those individuals who do lose their jobs, it is important that the furlough scheme ends so that they do not become stuck with employers with which they have no future. Yet their main alternative for income replacement – Universal Credit – provides vastly differently levels of support depending on personal circumstances.

In addition, the changing structure of the economy (such as the shift from the high street to e-commerce) means that those who lose their job after furlough ends may have to search for work in a new sector. That is likely to be easier for the young – who are especially likely to have been furloughed – but there may be persistent negative effects on earnings for younger workers who fail to find a job.

The government has two schemes to help unemployed workers to find jobs, both of which are likely to have some positive effects, though precisely how well they can cope in the current unusual situation is yet to be seen.

What’s happening to the furlough scheme?

The UK’s furlough scheme, known officially as the Coronavirus Job Retention Scheme (CJRS), will end on 30 September 2021, at least according to current plans. This is actually the seventh date for the closure of furlough that the government has given. It was originally only meant to last for three months, but the end dates have been repeatedly pushed back when public health restrictions were retained for longer than had been hoped.

The government is phasing out the furlough scheme throughout the summer. Currently, employers with staff on furlough are only obliged to pay employer National Insurance and pension contributions, with the government picking up 80% of the employee’s normal earnings (up to a cap of £2,500 per month). From July, the government will only cover 70% of salaries (with employers paying 10%) and in August the figure will fall to 60% (employers paying 20%).

At the end of March 2021, around 4.2 million jobs were furloughed (Figure 1) – less than half the peak of nine million in April 2020, but still representing something like one in every seven employees.

The requirement for employers to pay more, together with an expectation of a recovering economy, means that even before the scheme ends the Bank of England forecast that the number of workers on furlough will drop to around 500,000.

Figure 1: Number of jobs furloughed

Source: HMRC, Coronavirus (COVID-19) statistics

Some of the millions of employees currently on furlough will be able to return to their old job. But this will not be the case for all. The prospects these workers face is the issue we turn to now.

What support is available for those who become unemployed?

Some of those who are not recalled to their old job will spend at least some time unemployed. The main type of support available for them is Universal Credit (UC), a means-tested family benefit (in other words, entitlement is higher for poorer families).

In the wake of the pandemic, the government made a high profile £20 per week increase to UC – equivalent to about 13% of claimants’ entitlements on average (Bourquin and Waters, 2020). But that expansion is due to finish at the same time as furlough ends.

The bigger picture, though, is that UC provides a very different kind of support to furlough. Under furlough, an employee’s entitlement was based on their previous (pre-furlough) individual earnings alone. By contrast, UC looks at current earnings, as well many other factors, including the earnings of any partner, family assets, number of children, and rent, in order to target support at those in need of particular financial assistance.

This means that the kind of income drop that an individual might experience as they make the transition from furlough to unemployment varies enormously – even for people who had the same level of pre-furlough earnings.

This can be seen in Table 1, which shows how much support the government provides via furlough and UC, for three people who previously earned £20,000 per year and are furloughed when the scheme is available and unemployed when it is not.

When the furlough scheme ends, a single individual without children who owns their own home (person 1) has a UC entitlement of less than a quarter of their furlough payment.

Conversely, an otherwise identical lone parent renter (person 2) sees their support fall by ‘only’ a third – because of their higher needs (housing costs and children). They are on UC even when furloughed and UC makes up more of their lost earnings when the furlough scheme ends.

But if that same person had a high-earning partner (person 3), they would not be entitled to UC at all – because it is based on family earnings, so they are assessed as having too high income. They would be likely to be eligible for ‘new style’ Jobseeker’s Allowance, providing the same level of support that person 1 receives, but only for six months (whereas person 1’s entitlement would be indefinite).

It is worth noting that all of these examples consider a person earning £20,000 before being furloughed. Another important distinction between furlough and UC is that furlough pays more to higher earners, whereas UC entitlement is unrelated to prior earnings. Thus, the decline in income when making the transition from furlough to UC will tend to be bigger for those who earned more beforehand.

Table 1: Furlough, Universal Credit and Jobseeker’s Allowance entitlements for example individuals whose employer has no work for them

Person 1Person 2Person 3
Characteristics   
Pre-furlough earnings (per annum)£20,000£20,000£20,000
Partner?NoNoYes
Partner's earnings (per annum)N/AN/A£50,000
Children022
Rent (per week)£0£150£150
Furlough + Universal Credit + Jobseeker’s Allowance   
With furlough scheme (per annum)£16,000£26,944£16,000
Without furlough scheme (per annum)£3,885£17,898£3,885 for 6 months, then £0
Notes: ‘With furlough scheme’ shows the furlough plus UC entitlement assuming that the employee is furloughed. ‘Without furlough scheme’ shows UC and New Style Jobseeker’s Allowance entitlement assuming that the employee loses their job and has paid enough National Insurance contributions in the past to qualify for New Style Jobseeker’s Allowance. The family is assumed to have no income other than earnings, no assets, no disabilities, and no childcare costs. Some of these individuals might be eligible for other support, such as Child Benefit or Council Tax Support. Calculations assume that the £20 per week uplift to UC has ended. Gross furlough payments are shown, though these payments are subject to tax.
Source: Authors’ calculations using TAXBEN, the IFS tax and benefit microsimulation model

Where might the new jobs be?

One feature of the furlough scheme that is unlike a standard unemployment insurance scheme (which pays those who have lost their job entirely) is that when an employer has productive work for an employee to do, they can recall them and their time on furlough ends.

In that way, it has an inbuilt mechanism that causes it to unwind as the economy recovers. But if another employer has an opening for the employee, there is no such mechanism to push them to that job. For this reason, it makes sense for the government eventually to end furlough, rather than just to wait until all furloughed employees have been recalled. This is a particularly pertinent issue in that the pandemic is likely to have long-lasting effects on the structure of the economy.

First, there has been a shift towards online shopping or e-commerce and away from the high street. There seems to have been a persistent increase in spending on online retailers, and a decline in offline spending and cash usage – changes that were still clearly present and stable even during the period in the summer of 2020 when the economy was relatively open (Firth et al, 2020; Davenport et al, 2020). This follows a decade when jobs in retail were declining as a share of the workforce (Bourquin and Waters, 2020).

Second, it is widely expected that there will be a greater degree of working from home even when restrictions lift. One study using survey data indicates that the share of working days done from home in the United States will rise from 5% before the pandemic to 20% afterwards (Barrero et al, 2021). This has implications for ‘locally consumed services’ – things like restaurants, coffee shops and gyms that are currently heavily concentrated in commercial areas from which workers are likely to be moving away (De Fraja et al, 2021).

Workers in negatively affected sectors are likely to need to look for work either in other industries or perhaps in other areas. What we do not know is whether those  who are working from home will begin to demand more locally consumed services near their homes. This has important implications for whether, for example, a coffee shop worker can simply start working in a residential neighbourhood rather than a commercial one – or whether they will need to move to a new sector entirely, such as e-commerce.

In the long run, this sort of transition is important to make sure that the economy continues to serve the needs and preferences of the population. But in the short run, it may be painful for unemployed workers. The extent of that pain depends on the ease of transition.

How easy will it be to make the transition to new jobs? How is the government planning to support the transition as it ends furlough?

There are a range of factors that are associated with ease or difficulty in finding a new job after unemployment, and the extent to which these new jobs are paid less. A study of evidence in 14 countries by the OECD found that young workers are much more likely to find new work quickly than older workers and more educated people find it easier than less educated people (Quintini and Venn, 2013). While men and women see similar rates of re-employment, men tend more often to get jobs that pay below their previous pay rates.

Nonetheless, in this case there may be a particular reason to worry about the long-term effects on younger adults. Figure 2 shows that around 30% of employees under the age of 18, and 20% of employees aged 18-24 were furloughed at the end of March 2021, compared with 13% of employees aged 45-54.

The concentration of furloughing among younger workers, combined with the fact that the longer-term prospects of retail (a sector that disproportionately employs younger adults) are somewhat uncertain, means that they may struggle in particular.

Admittedly, it is probably easier to make the transition to a new sector, occupation or part of the country when one is young, and these sorts of changes are more common in normal times among younger workers (Topel and Ward, 1992). But an extended time out of work can have long-lasting ‘scarring’ effects on younger workers, potentially affecting their employment prospects for many years to come (Burgess and Propper, 2003; Gregg and Tominey, 2005).

Figure 2: Share of employees furloughed by age, 31 March 2021

Notes: Figure shows the number of jobs furloughed on 31 March 2021 in each age group, divided by the pre-pandemic (2019Q4) number of employees in that age group.
Source: Authors’ calculations using the Labour Force Survey and HMRC, Coronavirus (COVID-19) statistics

Perhaps with this in mind, the government is introducing the ‘Kickstart’ scheme, which subsidises employers to hire young UC claimants who are deemed at risk of long-term unemployment. Evidence suggests that this sort of subsidy has relatively modest effects on employment immediately after the programme ends, but quite large effects in the long run as participants are able to draw on the skills gained (Card et al, 2015). Whether that evidence carries over to the current rather unusual situation – when larger sectoral shifts are likely to be required – is yet to be seen.

In addition, the ‘Restart’ scheme is being introduced. This is targeted at UC claimants who have been unemployed for 12 to 18 months, regardless of their age. Participants will be given help for getting into employment in the form of training, and assistance with job search and applications.

These sorts of programmes do have a positive effect on future employment, though more in the short run than the long run (Card et al, 2015). Notably, eligibility for both Kickstart and Restart is predicated on receipt of UC. As discussed above, some workers will not be eligible for UC at all when they lose their job – so will not get this sort of support.

One kind of scheme that is conspicuously absent is an industry-specific one. Even by the end of September 2021, certain industries are likely to have some jobs that are viable in the long term but not the short term – airlines probably being the clearest case.

The government could provide a limited furlough scheme for industries it judges as being especially likely to have this sort of job. They have provided sector-specific support in the form of business rates relief, but thus far have proven unwilling to do the same for furlough.

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Authors: Jonathan Cribb and Tom Waters
Photo by John Cameron on Unsplash
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