Making the most of furlough

With 850,000 jobs still at risk by the end of summer, furlough can play a transformational role in training and education beyond September

In March 2021 the job retention scheme (JRS) was extended for the third time, and is now scheduled to end on 30 September 2021. This five-month extension, announced by chancellor Rishi Sunak, was vital and should have been confirmed far earlier. Using Office for National Statistics (ONS) data from the past year of the pandemic, NEF estimated in March that, if furlough hadn’t been extended, between two and three million jobs would otherwise have been at-risk’: of unemployment, loss of hours, or loss of pay at the end of April.

On the face of it, the extension is good news. Using the model we built last year to understand the effectiveness of different government support schemes, we estimate that the extension will initially protect 90% of at-risk’ jobs. But only initially. From the summer the scheme becomes less generous, asking employers to contribute 10% of the pay for unworked hours in July, then 20% in August and September. If we look at the whole five-month extension, our modelling finds that the scheme is only actually cost effective for 57% of the jobs which are likely candidates for enrolment.

This doesn’t necessarily mean that the other 43% of at-risk jobs will be cut, or see cuts to hours or pay. Some businesses may be willing to accept a modest cost to putting their workers on furlough. However, companies’ capacity to do so has been severely eroded throughout the pandemic. The latest Business Impact of COVID-19 Survey from the ONS suggests 32% of businesses (weighted by turnover) have less than three months of cash reserves, and 8% have less than one month.

In designing the five month extension to the JRS, it seems the chancellor is banking heavily on the economy seeing a rapid recovery in business activity, so that companies have more confidence in retaining their workers. Sunak may well be hoping that the scheme will be largely unnecessary by August and September. This seems optimistic however, since the Office for Budget Responsibility’s (OBR) budget forecast suggests the economy will still be 4.9%, 3.8%, and 2.5% below its pre-pandemic level in August, September, and October, respectively (see Figure 1).

Figure 1: The latest OBR forecast suggests the UK economy will not return to pre-pandemic levels until well into 2022

While this level of economic activity would represent an improvement on any level seen in the crisis to-date, our analysis suggests there could still be significant under-utilised worker capacity. We estimate that by the end of September as many as 850,000 jobs could still be at risk of unemployment, loss of hours, or loss of pay. Our estimate is supported by the OBR’s forecast for unemployment. The OBR suggests that, if the government sticks to their current policy plans, unemployment could grow by around 1.3%, or 450,000 people, this year, with the majority occurring between the third and fourth quarter of the year, as the JRS scheme comes to an end.

A surge in unemployment would put hundreds of thousands more people out of work, and leave them to fall back on our threadbare social security system. But is it not inevitable. The government could continue to protect workers by not only improving the cost-effectiveness of the scheme for businesses by reducing the employer contribution over summer, but also by establishing a new, improved, and longer-term job support scheme.

This government’s fear is of creating a scheme which props up jobs that will not survive the pandemic, but they are missing a trick. While it is true that some jobs may never come back due to the long-term structural impacts of the crisis (sometimes termed scarring’), there are other benefits which can be reaped from a longer-term furlough-style policy. As the chief economist at the Bank of England put it recently the risk of workers facing the jobs-equivalent of long Covid is considerable. Avoiding that chronic economic ailment will require structural, skill-focused policies, equivalent in speed and scale to the demand-side policies already put in place”.

In 2020, we estimate workers spent a total of approximately 6.4bn hours on furlough (see Figure 2). The government’s failure to integrate education and training as a mandatory component to the scheme means the productive potential of these hours was not maximised. Looking forward, we estimate a further 3.3bn hours will be spent on the scheme by September. In the short-term, skilling up workers in the spare time they have while on furlough would make them more attractive for their employers to bring back. In the long run it could improve the return the government sees, as higher-skilled workers are more productive and produce a greater tax return. In the event that these workers do ultimately find themselves unemployed, higher qualified workers also typically spend less time out of work — thereby reducing the government’s costs in the form of universal credit payments.

Figure 2: NEF modelling suggests 6.4bn hours were spent on furlough in 2020, and a further 3.3bn will be spent on furlough in 2021 under current policy arrangements.

The UK economy is undergoing structural change. Some prolonged pandemic impacts are unavoidable, in addition to changes from automation and the zero-carbon transition. Through these shifts there is a cast-iron case for a longer-term job support scheme, encouraging employers to keep workers in at least partial employment, while skilling them for the jobs and industries of the future.

Notes: For further details on NEF’s job retention scheme model please see
Job Support Scheme leaves two million jobs unprotected’, October 2020. NEF modelling of hours on furlough assumes fully furloughed workers were working the UK average number of weekly hours (32 hours) prior to registering on the scheme and partially furloughed workers are furloughed for 50% of their previous weekly hours (16 hours). The ratio between fully and partially furloughed workers is assumed to remain broadly constant throughout the scheme’s life, as has been the case to-date. The rate of furlough in future months is estimated based on NEF analysis of the government’s proposed roadmap of lockdown easing and modelled relationships between levels of restriction and rates of furlough.

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