Once furlough ends there will be an unemployment spike – but how high?

There were few reasons to be cheerful in yesterday’s jobs numbers, despite unemployment barely having budged since the start of the pandemic. By the official definition, just 3.9 per cent of the workforce is unemployed.

Yet at the same time there are 730,000 fewer people on employers’ payrolls. How can this be? The headline figure counts people out of work and actively looking for a job, a perfectly reasonable thing to measure in normal times but basically useless as a guide for our present situation.

Given the lack of vacancies around, many people out of work have not started looking. A lot of those who have left the labour market are over 65, who may have opted to retire rather than start job-hunting during a pandemic. The other measure of unemployment we tend to use is the claimant count. It’s a slightly better guide at present but by no means perfect as it includes a lot of people who are in work but claiming benefits to top up low pay.

It shot up from 1.2 million in March to 2.6 million in April and has only crept up since as government support has kept a lid on job losses. An extra 94,400 people were added to the claimant count between 11 June and 9 July. The main reason unemployment figures are so wayward is that there are millions of people on furlough, meaning they are technically still employed but not doing any work.

HMRC has processed 9.4 million applications to furlough workers. Someone working two part-time jobs could have been furloughed twice but, assuming that’s relatively rare, an awful lot of people are temporarily not working.

Around 4 million furloughed workers are thought to have gone back to work already. The best official figure we have is that there are an estimated 7.5 million people – a quarter of the workforce – temporarily absent from work. That’s more than 5 million above the pre-pandemic average. This fits very roughly with the 20 per cent drop in total weekly hours worked.

These numbers are a more illuminating guide to the labour market right now. However, it’s worth noting that they come from a survey, meaning that people self-certify their status.

A study out this week suggested that a majority of people on furlough have actually still been working, even during the period up until 1 July when it was illegal to do so. If that is right, it could mean the drop in output may not be as bad as feared and that people who may have been less than truthful about their working status will move from the “temporarily absent” column to the “employed” column the next time the ONS does its labour force survey.

For an employer, claiming furlough pay for hours that an employee is working is against the law but makes rational sense for businesses, particularly smaller ones, which thought they could not survive without support but needed their staff to do some work. It was built into the incentives of the all-or-nothing nature of the furlough scheme that some will have cheated the system.

Those incentives started to change on 1 July when employers could bring staff back part time and particularly since 1 August when they had to begin contributing towards staff costs, which leads to the crucial question of how many people they will bring back and how many they will let go. The next 11 weeks will be the crunch point in answering that question.

It will depend on many things like confidence in the UK’s economic future, additional government support and how well the virus is contained as we move into the winter months. There are some signs that activity is picking up, with consumer spending getting back up towards its February level and a strong take-up of the government’s half-price meals scheme.

Even at the best of times, making economic forecasts is more of an art and less of a science than many economists would like to admit. At this point in time the uncertainty makes it close to impossible. But only optimists of the sunniest disposition would predict anything other than a sharp rise in unemployment as the furlough scheme is withdrawn.