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

What’s happened in the UK labour market during the Covid-19 recession?

Mass job losses in the UK have been stemmed by the furlough schemes, although there have been notable declines in employment among younger age groups and in certain sectors. More labour market adjustment has come through reductions in hours worked than in past recessions.

Over the ten months since the first lockdowns in response to the pandemic, labour markets around the world, including in the UK, have been characterised by large falls in employment and self-employment, record rises in unemployment claims and massive falls in hours worked. There is a range of ways that employers can react to negative shocks: through layoffs, changes in hours or changes in pay.

What’s happened to employment and job loss?

The latest official figures released by the Office for National Statistics (ONS) show that between February 2020 and December 2020, the number of payroll employees fell by 828,000, based on HM Revenue & Customs (HMRC) PAYE real-time information (RTI) data (ONS, 2021). There is also some evidence, based on preliminary data, of a slight increase in payroll employment in December 2020 compared with November 2020.

According to the Labour Force Survey (LFS), the estimated unemployment rate reached 5% in the three months to November 2020, which is 1.2 percentage points higher than a year earlier. There are challenges in measuring the labour market as a result of the pandemic. Although the LFS and HMRC RTI data measure slightly different things, they have followed a similar path for at least the last five years. Since April 2020, the RTI data have shown a much larger decline in employees relative to what is reported in the LFS – as Figure 1 shows. The LFS suggests a fall in employment of about 570,000 between the start of the pandemic and the three months to November 2020, suggesting that the unemployment rate from the LFS is understated.

Possible explanations for the divergence in employee numbers between the LFS and the RTI are large flows from self-employment to employee status as a result of reclassification and a group of 280,000 people in the LFS who describe themselves as employed but are away from their jobs and not being paid (ONS, 2020). Whether these people are really going to go back to their jobs or are in fact unemployed is not clear.

Recent analysis highlights that the way in which the ONS has ‘grossed up’ people in the LFS may have resulted in an overestimate of the number of employees in the survey (O’Connor and Portes, 2021). The authors provide a preliminary adjustment to the LFS that is more consistent with RTI employee figures.

Figure 1: Annual growth in number of payrolled employees

Note: From Pay As You Earn (PAYE) Real Time Information (RTI) and the number of employees and people in employment from the Labour Force Survey (LFS), UK, seasonally adjusted, three months to July 2015 to three months to September 2020
Source: Office for National Statistics, Labour Force Survey and HM Revenue and Customs, Pay As You Earn Real Time Information

There has been a particularly large drop in the number of young people (aged 16-24) in employment over the last year – see Figure 2. Workers from an ethnic minority group, women, low paid workers and disabled workers have also been the most negatively affected by the crisis. In the period September-November 2020, 591,000 young people aged 16-24 were unemployed (an unemployment rate of 14.2%), an increase of 11,000 from the previous quarter and an increase of 109,000 from the year before.

Figure 2: UK employment level by age (16 years and over)

Note: Seasonally adjusted, cumulative growth from September to November 2019, for each period up to September to November 2020
Source: Office for National Statistics, Labour Force Survey

The nature of this crisis is intensely sector-specific, as Figure 3 shows. Of the 828,000 decrease in payroll employees since February 2020, 343,000 can be attributed to employees working in the accommodation and food services sector, with a further 166,000 lost from the wholesale and retail sectors.

Figure 3: Payrolled employees (by industry)

Note: Absolute change on February 2020, seasonally adjusted, UK, December 2020
Source: HM Revenue and Customs, Pay As You Earn Real Time Information

Mass job losses have been stemmed by the furlough schemes in the UK, but there is nevertheless a steady decline in employment, with evidence from ONS surveys that the rate of redundancies has been increasing over recent months (ONS, 2021).

The level of redundancies in September-November 2020 was the highest in any quarter since records began in 1995, reaching a record high of 395,000 in that quarter – see Figure 4. In August-October 2020, the overall redundancy rate for people aged 16 years and over was a record high of 13.3 per thousand employees. In the same period a year earlier, the rate was 4.3 per thousand. Experimental weekly LFS estimates show that the number of people reporting redundancy fell in October after reaching a peak in September, but appears to be rising again in November (these data are more volatile), despite the extension of the furlough scheme.

Those aged 25-34 years had the highest redundancy rate of 16.2 per thousand (compared with 3.1 per thousand a year earlier). The highest redundancy rates were seen in other services (including arts, entertainment and recreation), accommodation and food services, and administrative and support services.

Across the UK, the redundancy rate increased across all regions, but was highest in the East of England (16.6 per thousand, compared with 4.3 per thousand a year earlier) and the West Midlands (16.5 per thousand, compared with 5.1 per thousand a year earlier).

Figure 4: UK redundancy rate

Note: People aged 16 and over, not seasonally adjusted, between September to November 2005 and September to November 2020
Source: Office for National Statistics, Labour Force Survey

One way in which the current crisis is different from past recessions is the way in which the labour market has adjusted mainly through a reduction in hours worked, instead of a more equal split between falls in employment and average hours worked. Figure 5 shows the dramatic fall in hours worked from the January-March 2020 quarter, before a subsequent recovery, with total hours worked remaining at a relatively low level at 7% below the level in September-November 2019.

Figure 5: UK total actual weekly hours worked

Note: People aged 16 and over, seasonally adjusted, between September to November 2005 and September to November 2020
Source: Office for National Statistics, Labour Force Survey

There is also evidence of big changes in the labour market as a result of changes in immigration. Analysis shows that almost 1.3 million non-UK-born people may have left the UK between July-September 2019 and July-September 2020, a figure that includes almost 700,000 leaving London (O’Connor and Portes, 2021). Immigrants are disproportionately employed in hard-hit sectors such as hospitality, and the analysis suggests that many have emigrated rather than remain unemployed.

What policies have been implemented in response to the crisis?

In the UK, by mid-December 2020, about 9.9 million employee jobs had been furloughed through the government’s Coronavirus Job Retention Scheme (CJRS), and about 2.6 million claims had been made to the Self-Employment Income Support Scheme (SEISS). The furlough of employee jobs reached a peak of 8.9 million in May (approximately 30% of the workforce), with the latest (provisional) figures showing about 3.8 million employees on furlough at the end of December 2020.

The original CJRS scheme ended on 31 October 2020, but was subsequently extended until the end of April 2021. The current (and original) scheme allows employers with a PAYE scheme to claim 80% of an employee’s usual salary for hours not worked, up to a maximum of £2,500 per month (the generosity of the CJRS was reduced for the period August-October 2020).

The SEISS provides quarterly payments worth 80% of pre-pandemic profits up to a maximum of £7,500 per quarter for eligible self-employed people who have been adversely affected by the pandemic. An all-party parliamentary group and recent analysis by the Institute for Fiscal Studies (IFS) have brought attention to those who have been excluded from the SEISS: about 1.8 million self-employed workers and approximately 700,000 owner-directors of limited companies.

The self-employed includes about 200,000 who did not or could not file a 2018/19 tax return because they had just started in self-employed when the pandemic struck, about 225,000 people who made profits of more than £50,000 per year, and about 1.3 million who have less than half of their income coming from self-employment (Cribb et al, 2021).

What about new labour market entrants?

Labour market policies have mostly focused on helping those who have lost work, not on those entering the labour market for the first time. The high level of unemployment among younger age cohorts points to the serious challenges facing new labour market entrants, whether school leavers or graduates, and the high likelihood of long-term ‘scarring’ effects.

A June 2020 piece on the Economics Observatory discussed some of the evidence from previous recessions on scarring. Some of the sectors most affected by the current crisis are often the ones that have typically absorbed negative employment shocks in previous recessions – sectors that have been termed ‘non-viable’ and therefore less likely to receive support.

Many young people at school or in higher education might decide to stay on in education longer, which will imply the need for additional funding on an emergency basis aimed at both students and institutions. Further government support is likely to be needed to support new entrants and those looking for work after losing their job. These transitions could be eased by significant investment in human capital through training or retraining to reduce the negative consequences of scarring.

How long will it take for high unemployment to unwind?

Economies generally recover to pre-crisis levels of activity after recessions, but it takes time, and the structure of the economy is usually left permanently changed (Hershbein and Stuart, 2020). After the previous two recessions, it took about seven years for the unemployment rate to return to pre-recession levels.

Structural changes in the economy post-Covid-19 will mean that many workers who have lost their jobs will need to find new ones, and these transitions can be time-consuming. There is likely to be a permanent displacement of face-to-face retail jobs in favour of online retail. The persistence of high levels of remote working and changes to commuting patterns will affect other sectors as well as retail.

The Covid-19 shock has been different from previous shocks, and demand may rebound relatively quickly in some sectors, as was apparent when restrictions were eased during the summer of 2020. Against this is the continuing uncertainty, exacerbated by the constant changing of government policy around restrictions to prevent spread of the virus and economic support. There is also uncertainty over the government’s strategy towards suppressing or eliminating the virus, the long-term immunity provided by the Covid-19 vaccines, and the emergence of new variants of the virus.

What is the future of government policy?

Most government policy has been focused on job preservation, rather than the creation of new jobs and supporting people to make the transition to new jobs. While the furlough schemes were clearly the right thing to do in response to the crisis, government policy needs to evolve as the nature of the crisis changes.

In the UK, the announcement that the furlough scheme would stop at the end of October was short-sighted, as it was inconsistent with the reality of the continuing health emergency. Had the scheme been extended until the middle of 2021, the short-term budgetary cost of paying businesses to keep employees on furlough would have been relatively small once the taxes they would pay and the benefits they would not receive were taken into account. A significant proportion of the redundancies that occurred in the three months ending in October may not have occurred if the furlough scheme had been extended with sufficient notice.

Keeping people in jobs, even when on furlough, helps protect productivity and limits scarring as firm-specific skills are not lost, and furloughed employees remain attached to the labour market. By protecting the incomes of furloughed workers, this would have added to consumer and firm confidence and aggregate demand, in contrast to the greater uncertainty of the stop-go approach that the government has taken.

Prior to the introduction of a new national lockdown at the end of October, the government had announced a new less generous Job Support Scheme (JSS), with a focus on supporting ‘viable’ jobs. But the definition of a viable job is misguided as there may be many jobs in sectors such as the arts that may be viable once Covid-19 restrictions on social distancing are no longer required.

The JSS would also have given incentives to employers to keep one person on full-time rather than two people part-time, because the employer has to make a contribution for the time an employee is not working. This is in contrast to short-time working schemes such as the German Kurzarbeit scheme, which encourages the retention of part-time workers.

At this point, the JSS has been postponed, but it is presumably likely to be implemented whenever the CJRS finally comes to an end. Removing support to sectors or regions where social distancing restrictions are still in place, and implementing a policy with obvious flaws is clearly problematic.

Existing policies have helped to mitigate the worst effects of the crisis, but there is clearly a need to speed up the reallocation of workers to more promising firms in the face of structural changes in the economy. The record of economic policy in dealing with previous mass displacements of workers in response to previous shocks is not particularly good. The potential for unemployment to build up into long-term unemployment is a major concern as this is harder to escape and is more likely to leave lasting scars on both individuals and the communities where they live.

The UK government has announced further policies such as the Kickstart Scheme, a hiring subsidy, which covers wage and employer contributions for a new six-month job placement for 16-24 year olds currently receiving Universal Credit. A National Skills Fund of £2.5 billion is being set up to provide funding for adults who have lost their jobs to retrain.

While these schemes are welcome, they will only start to be implemented in mid-2021, which is quite late. Further funding is needed in a context where employer investment in training in the UK is low relative to many other similar countries.

Redundancies remain high and there are approximately 3.8 million employees on furlough. It isn’t clear what support is going to be in place when furlough ends in April for those who don’t return to their old jobs, and what measures will be in place to stimulate the economy to prevent a major unemployment crisis.

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Author: Andrew Aitken, NIESR
Photo by Tim Gouw from Pexels
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