Some jobs won’t come back

Ahead of the spring budget on Wednesday, the OBR and Bank of England have predicted that unemployment could rise to between 7.5% and 7.7% in Q2 2021. This means that, by May around an extra 1.2 million people could have become unemployed since last March. This figure, however, assumes that the coronavirus job retention scheme (JRS, commonly known as furlough) will finish in April, as currently scheduled. The JRS has held back a surge of unemployment for almost a year now, and it looks likely the chancellor will, rightly, announce an extension.

For many, such an extension could be enough to save their job. The vaccine rollout is going well and optimism is high for a rapid recovery in economic activity over summer 2021, particularly since the government’s announcement of its roadmap for easing public health restrictions. This could allow employers to start bringing their employees back into work.

However, there are a few significant reasons for caution. It is likely that it will take some months after restrictions are fully relaxed for businesses to bring all of their furloughed employees back to work. After three months of relaxed restrictions last summer, and with schemes like Eat Out to Help Out in place, the UK’s furlough rate remained at 7.7%, equivalent to around 2.1 million jobs still requiring state support. As well as the lag between restrictions easing and unemployment falling, a critical cause for concern is the rise in ​‘structural unemployment’. For these reasons, the UK will need some form of job support scheme to become permanent — something which has already been the case in countries like Germany for decades.

The spectre of long-term unemployment

Structural unemployment refers to those workers who are unemployed due to permanent shifts in how the economy works, often driven by processes like technological change. This is exacerbated when there is a mismatch between the skills that the unemployed cohort have, and the skills which industries that are hiring need. The OBR says that the number of structurally unemployed people has been rising ​“due to permanent behavioural changes prompted by the pandemic (such as more working from home, less business travel and the shift to online retail) that require labour to shift across occupations, sectors and regions, compounding the restructuring necessitated by Brexit”.

We have detected a rise in structural unemployment over the last year in the data. Despite the JRS being in place, the UK’s unemployment rate has steadily increased over the past 12 months, rising from 4.0% in the first quarter of 2020, to 5.1% in the fourth quarter, according to the ONS. Some portion of this increase will be people falling through the cracks of the furlough scheme, for example because of insecure employment contracts. But some portion will also reflect employers letting people go because they don’t think the roles are viable long-term, even if they only need to cover national insurance and pension contributions through the JRS. This latter group makes up the structurally unemployed.

The OBR also expects this trend to continue. Their November forecast suggested the structural unemployment rate had already risen to 5.5% by Q2 2020, with the actual rate of unemployment below this as a result of the government’s various emergency schemes. They expect the unemployment rate to overshoot the rate of structural employment this April, when the JRS is due to expire (Figure 1). We have calculated that the increase in structural unemployment translates into an additional 500,000 people structurally unemployed compared to pre-pandemic levels (January-March 2020), having lost work which is unlikely to return when public health restrictions are lifted, in sectors like retail, accommodation and food.

Although the economic recovery is likely to create new jobs in the longer term, two problems remain. The first is that the OBR expects structural unemployment to remain elevated for at least the next five years. Even if it does eventually fall back, this is still five years of economic misery and hardship that could otherwise be avoided through a different set of policy choices.

But just as serious is the second risk, that the OBR may be underestimating the extent of long-term changes in the economy after Covid, and therefore the length and scale of the UK’s potential unemployment problem. This could be caused by things like: future waves of the pandemic, more disruptive endemic diseases than currently anticipated, and permanent changes in behaviour relating to things like remote working and online shopping. And on top of that, there are the structural shifts required to cut the UK’s carbon emissions, in line with the government’s targets.

Figure 1: Increased levels of structural unemployment will persist for at least the remainder of this parliamentary term

The term sometimes used for the elevated structural unemployment that the OBR is predicting is ​‘economic scarring’ — but this process isn’t inevitable. Much rests on the design, resourcing, and responsiveness of the employment and income support programmes, education, and training provided by the state. All of these state provisions, however, are in poor condition in the UK, following a decade of short-sighted austerity. In fact, in the Learning and Work Institute’s (LWI) latest survey in 2019, adult participation in learning hit its lowest level since the LWI began measuring in 1996. Part-time study in older adults, often for the purpose of retraining, has been particularly badly hit.

Retraining and upskilling for the future

The government is clearly aware there are issues, and in November announced an assortment of schemes to address the risk of structural unemployment. The Restart scheme provided £2.9bn of funding to support people who are unemployed for 12 months or more to find work. The Kickstart scheme subsidised employers to hire people on universal credit aged 16 to 24. The government also offered free courses to people without an A‑level, or equivalent level of qualification. But, like so many of the government’s recent interventions, these schemes are littered with holes and fail to address the fundamental issues in the UK economy, with little on offer to many of the 500,000 or more workers who will be newly structurally unemployed by April this year. None of these schemes address the inadequacies of universal credit, which force adults of all ages to chase low-quality unsuitable work, over good-quality, skilled or vocational work. Nor do they fix the funding problems which have undermined later-life retraining through further and higher education.

The economic fallout of the pandemic also comes on the heels of the UK’s net-zero goals, which will require every major industrial sector to retool and retrain their workforce to become low- or zero-carbon within the next two decades. The Grantham institute have suggested that around 10% of the UK workforce could require some upskilling or retraining for the zero carbon transition. This transition should be invigorated by a significant fiscal stimulus aimed at boosting our post-crisis recovery, and putting in place both the green and social infrastructure needed for a sustainable economy (for more details of how this should work, see our Winter Plan). To ensure these macroeconomic changes do not leave workers and communities behind, we should now formalise a permanent job support and upskilling scheme.

“There is a tremendous need for a new workforce with the right skills to meet the demands of the care sector and the emerging low-carbon economy.”

There is a tremendous need for a new workforce with the right skills to meet the demands of the care sector and the emerging low-carbon economy. The new support scheme should offer a ​‘right to retrain’ for workers in sectors that are facing a decline in job numbers (like aviation), or in industries that need to retool to meet changing demands (like car manufacturing).

We have published a detailed analysis of how a ​‘right to retrain’ scheme could support workers in the aviation sector, and the economic case for such a scheme. We found that moving a worker up one tier of education (eg, from no qualifications to GCSE-level qualifications, or from A‑level to degree level qualifications) can reduce the average length of time they spend unemployed by around four weeks. Once they obtain employment, workers will likely also enter a more productive job and we estimated that this should increase the government’s tax take per employee by around 6 – 12%.

Sunak’s choice for the budget

In the spring budget the chancellor needs to step up and present measures to prevent long-term economic and social scarring from the pandemic. A year ago, the chancellor promised he would do whatever it takes to support people’s livelihoods. We believe there is now a clear case for the extension of the furlough scheme for as long as public health restrictions continue and the recovery remains subdued. As the economy slowly reopens, we need a long-term job support scheme to prevent both a further rise in unemployment but also to offer an opportunity for workers to retrain and reskill for the post-Covid economy.

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