This is crunch time for the future of furlough
As the Government puts more onus for furloughed workers on employers, they must look to the longer term, writes Tim Wallace
Crunch time is here. Rishi Sunak has spent more than £33bn on the furlough scheme that has paid more than 9 million workers to stay at home for at least a spell since the pandemic began. But from this month, employers must chip in with national insurance and pension contributions.
Next month the Government will pay 70pc of wages instead of 80pc, with employers required to add in at least 10pc. That falls to 60pc in October before the scheme ends at the end of the month. The Chancellor is keen to wind it down, and so is the Governor of the Bank of England. But employers bear more of the cost of paying staff to not work, and have to decide whether to keep them at all. Should the scheme be extended to delay or soften those decisions?
The purpose of the job retention scheme was to ensure businesses that temporarily closed their doors did not have to sack all their staff. After the pandemic passed, they could restart operations without the slow and expensive process of rehiring. It would ease the pain for workers, too, keeping them earning while doing the right thing to stop the spread of the virus.
This has clearly worked for millions. Most furloughed workers have been taken back on, meaning the scheme helped bridge the gap between lockdown and reopening. Unemployment has not spiked as might have been expected during such a major recession.
However, hours worked have plunged, redundancies are rising, and a significant number are still on the scheme. With employers now starting to bear some costs, this could be the moment when layoffs surge.
There is a bonus to encourage bosses to take staff back. The hospitality industry has a boost from the “eat out to help out” discounts. But it is a dangerous moment.
France has adopted a German-style part-time unemployment system that could last for another year or even two, while Italy has lengthened its furlough. Should the UK follow suit?
The question turns on whether those still furloughed will ultimately go back to their jobs. If the world eventually returns to “normal”, their jobs will come back, and an extension makes sense. But if there has been a serious change in the UK’s economic structure, they will never return, and the furlough scheme risks delaying those workers’ moves into new jobs.
Garry Young, of the National Institute of Economic and Social Research, warns that the “premature” end of the scheme could push unemployment to above 10pc. He would prefer it to be extended to mid-2021. “When the scheme ends, some of those people will lose their jobs because some firms are not in position to take them back when they have to maintain social distancing. Yet those would be valuable jobs in a world where you could operate as normal,” he says.
‘Scarring’ is a worry: “If people lose their jobs in the current situation, they are not quickly going to find new ones. They become detached from the labour market, become long-term unemployed, and we’ve known from previous recessions that the more long-term unemployed there are, the worse the outlook is.”
That raises the spectre of an Eighties-style crunch. Extending furlough would cost an estimated £10bn or more. However, the risk of extension is that jobs that are simply never going to come back are kept on ice at taxpayers’ expense, wasting money and also the time of those kept in suspense.
Instead it would be better for staff to start looking for more sustainable and productive jobs, says Kallum Pickering, economist at Berenberg Bank.
“We should be looking to get workers out of unproductive industries into productive industries and you don’t do that by artificially lengthening the time workers are employed in industries which will no longer be required, better that you retrain them and spend money on the administration required to retrain and reallocate those workers,” he says. “What we need to do is allow people to exhibit some free will and freedom to spend on whatever their hearts desire and then once we recognise what are fresh and new growing industries, we figure out how to retrain those workers that were once working in the travel industry and get them into the industries of the future.”
More urgent are the needs of those businesses that have still not been allowed to reopen. Bowling alleys, ice rinks and wedding venues are among those blocked from operating, meaning they have to start incurring costs of employing furloughed staff without the option of bringing them back to start working and generating revenue.
They have not had a chance to test out the state of consumer demand so far, and risk being frozen into oblivion by the sustained lockdown with no fair shot at survival.
Just as companies hit with local lockdowns have been allowed to reaccess the scheme, so an extension for those never allowed out of lockdown could at least give them a fighting chance.
But for those businesses that are open and trading, this is their one opportunity to work out if they have a future.
A time of relaxation and reassessment of work may be approaching for many as Rishi Sunak, right, prepares to wind down the job retention scheme