Is there a case for a permanent furlough scheme?

The current low rate of unemployment

The current low rate of unemployment is a bit of a statistical technicality. Those on furlough are simply classed as “employed” by official statistics. Compare this to the situation in the US where instead of furlough, they had an enhanced unemployment benefit. The unemployment rate there jumped from around 4 to 15% - about three times the rate of the UK. The material situation of people in both countries was the same. The state was supporting them not to work. 

For this reason, we should be wary of being too excited about the low unemployment rate, which currently stands at 4.8%. We should consider those on furlough as being in an ambiguous quasi-employed/unemployed state. There were approximately 3.5 million people still on furlough at the beginning of May, according to the latest count from HMRC. Over 10% of the workforce. Moving them successfully back into work is the real challenge of the next few months. Some are surely furloughed from ‘zombie jobs’, which are now unviable. 

Has the furlough scheme been a success?

But there are grounds for optimism. Forecasters expect a relatively smooth transition for those on furlough back into work. Successive revisions to unemployment forecasts have seen the peak squashed down from a figure in similar territory to the post-financial crisis (a painful 7.5% in the OBRs November 2020 forecasts) to a much more modest 5.5% (Bank of England’s May 2021 forecasts). Already we see strong labour demand in furloughed sectors such as hospitality. Factors include; furlough itself (keeping people away from the labour market and thus maker it harder to recruit), a loss of EU workers from the UK during the pandemic, and the successful vaccine rollout bringing forward the economic recovery.

David Smith argued that the furlough scheme worked during Covid-19 so it could work in another downturn. But why stop at a downturn? The German equivalent of furlough – the kurzarbeit – has operated continuously since 1910. Whilst downturns will see a higher frequency of firms in trouble; not all firms have the good sense to time their disruption in line with the economic cycle. A temporary disruption could be localised, a flood or a tie over period to find a buyer for a steel plant etc. Of course, a downturn is when the political pressure will occur, but if the economic logic behind such a scheme applies at any time.

Furlough appears to have been a success in tying people and firms over. It is popular with employers. Research by the University of Leeds Business School found that 75% of managers would like to see a long term furlough support scheme. One fifth of whom reported that they would look to introduce a longer-term, self-funded furlough scheme when CJRS support ends.

What will the furlough scheme look like?

The prize for getting furlough right has not only been to save jobs and incomes but to facilitate a quick recovery. That is a big prize, but of course, it came with big costs. When the pandemic ends, the Government will have a range of schemes from across the globe to evaluate. The question will be not just about outcomes achieved but the costs of achieving those outcomes. A future furlough scheme will probably not look exactly like the present one but could be similar. Furlough was a blunt tool. The next iteration may have more targeting. It may – as in the US – support more generously those out of work. It may require less public subsidy and more employer support. 

In January 2021 we published a report - The future of furlough: Recommendations for now and for any future wage subsidy scheme. We talked with HR Directors of major employers affected by Covid-19. We discussed the trade-offs that policymakers must make when designing such a scheme, and we suggested some recommendations for a future scheme. One compelling case for a furlough scheme is to set expectations in advance of the next crisis. A threat of no furlough is no longer credible, and employers may take business planning with a potential furlough scheme in mind. This could undermine the market for insurance against rare but business-critical risks. The Government drew up the furlough scheme at serious speed, and weighed up most of its pitfalls against the need to act quickly and provide certainty to business. When another furlough scheme is required, it will no longer be ‘unprecedented’. We talked with HR Directors of major employers affected by Covid-19. We discussed the trade-offs that policymakers must make when designing such a scheme, and we suggested some recommendations for a future scheme. One compelling case for a furlough scheme is to set expectations in advance of the next crisis. A threat of no furlough is no longer credible, and employers may take business planning with a potential furlough scheme in mind. This could undermine the market for insurance against rare but business-critical risks. The Government drew up the furlough scheme at serious speed, and weighed up most of its pitfalls against the need to act quickly and provide certainty to business. When another furlough scheme is required, it will no longer be ‘unprecedented’.