Not out of the woods yet

At the end of September the furlough scheme (official name: the Coronavirus Job Retention Scheme, or CJRS) will come to an end. This date is arbitrary, not tied to any particular milestone in the pandemic or the state of our economy, yet it could be pivotal in determining the success of the UK’s economic recovery. In April 2021, we released research showing as many as 850,000 jobs could be at risk of redundancy, loss of hours, or loss of pay when the scheme closes in two months’ time. Today, we’ve updated our modelling and found that, broadly speaking, the outlook remains similar, and the UK faces both social suffering and unnecessary economic scarring from a premature end to its primary pandemic support mechanism.

The ending of most public health restrictions on 19 July has helped generate optimism for a faster-than-forecast economic recovery. The UK’s economic indicators have so far slightly outperformed the expectations held by the Office for Budget Responsibility (OBR) in its analysis for the March 2021 budget. Despite this, around 1.5m jobs remained registered on the furlough scheme at the end of June, and unemployment is forecast to grow significantly. The Treasury’s latest median forecast for the UK unemployment rate, derived from around 30 economic forecasters, predicts a rise to 5.5% between October and December (Q4) 2021, up from around 4.8% between March and May 2021. This means an additional 250,000 people are likely to fall out of employment over the next few months. Some forecasters, such a NIESR, are slightly less optimistic, predicting a rise to 6.5%, which would increase the total number of people unemployed by around 550,000.

Very significant uncertainty clouds all of these projections, particularly in three areas: (i) the extent that public health restrictions in the UK and abroad will continue to limit demand and the amount of people able to work (otherwise known as the labour supply); (ii) the extent that voluntary social distancing measures will suppress demand; and, (iii) the size of the impact of ​‘structural shifts’ and ​‘mismatches’ in the supply and demand of labour across UK sectors. We reviewed these issues to explore how demand for furlough might evolve over the next few months, and how first making the scheme less attractive to employers, then scrapping it entirely, might impact on workers.

Public health restrictions

The legal changes made on the 19 July did not signal the end of all of the public health restrictions affecting the economy. Widespread self-isolation could remain a requirement for those in close contact with a Covid-19-infected individual. Self-isolation will no longer be mandated for individuals who have received both vaccine jabs from 16 August but, at current rates, approximately 10 million adults will not have received both jabs by this date, which may extend the economic impacts of self-isolation into September and October. Self-isolation could suppress both demand for goods and services, and the supply of labour, and so delay the return to pre-pandemic levels of economic activity.

In addition, some form of public health restrictions on international travel, imposed by the UK and other nations’ governments, will continue for many months. MPs and industry figures have called for an extension to the furlough scheme to support aviation workers. At the end of June, one third of aviation sector workers in passenger air transport were still furloughed. But aviation is not the only sector suffering from curtailed international travel. Significant numbers of workers remain furloughed in, for example, educational jobs covering foreign language teaching as well as non-academic educational camps and courses. Activity in these sub-sectors will remain suppressed until a broader international recovery from the pandemic is secured.

Cautious public attitudes to social mixing and mobility

Research by the International Monetary Fund (IMF) that looked at earlier waves of the pandemic has suggested that as much as 50% of the change in a population’s mobility after a surge in virus cases is induced by voluntary, rather than enforced, social distancing. Given the continued prevalence of the virus in the community, albeit in a widely vaccinated population, consumer spending could be suppressed well after all legal restrictions are lifted.

These concerns are reinforced by scenarios presented in modelling from the government’s scientific advisory group. One scenario, modelled by Warwick University, assumes that voluntary social distancing will persist for up to seven months after restrictions end. This implies restricted mobility (people travelling around less) and likely restricted spending up to the end of 2021 (ie, well into Q4, when some forecasters hope the economy will return to pre-pandemic levels of activity). In another scenario, the London School of Hygiene and Tropical Medicine (LSHTM) suggest that mobility in retail and recreation (ie, travel to places such as restaurants, shopping centres, museums, and cinemas) and public transport sectors will only reach 95% and 80% of pre-pandemic levels respectively following unlocking on 19 July. Office for National Statistics (ONS) data suggests that, between 14 and 27 June, 15% of the arts, entertainment and recreation workforce, and 11% of the transportation workforce, were still furloughed. In addition, the Resolution Foundation observed there are sub-sectors in these industries where furlough rates are declining much more slowly than the economy-wide average: land and air transport, transport support services, and travel agencies, as well as film and TV. It remains to be seen whether some of these declines in activity are here to stay, as long-term structural shifts in societal behaviour – for example, travelling less by air.

Pent-up demand will partially aid recovery

The government’s economic forecasters are expecting there to be significant pent-up demand in the economy which may be released when restrictions are removed. This relates particularly to people who have managed to increase their savings significantly as a result of lower household spending through the crisis. More optimistic economic forecasters, such as the Bank of England, are assuming this will offset losses arising from some of the constraints discussed above. The distribution of this demand across sectors however, is not clear, and may not follow pre-crisis patterns. Spenders might have new priorities – they might continue to shop online, for example. Where temporary or permanent mismatches occur between sectors with high demand and sectors with an under-utilised workforce, demand for furlough may remain.

Factors outside the pandemic

A further complicating factor is that other non-pandemic-related economic issues also appear to be driving demand for the furlough scheme. Furlough rates in manufacturing, for example, no longer appear to be linked to the level of public health restrictions, with the rate actually increasing slightly in June to around 4.8% of the workforce. The automotive sector provides the strongest example, as it has seen rates rose from around 7% during the January 2021 peak in virus cases, to 21% in late June (see figure 1, below). These changes appear to be linked to international trade issues – notably a global semiconductor shortage and potentially also to Brexit-related impacts. This is no bad thing: the furlough scheme is suitable for precisely such situations to buffer the sector against short-term disruption. Indeed the current usage highlights the valuable role a variant of the furlough scheme could play for the UK longer term.

Jobs at risk after September

We tested two different approaches to estimating the number of jobs at risk of redundancy, loss of hours or loss of pay. The first is an approach grounded in macroeconomic forecasts (GDP), and the second in epidemiological modelling.

In our first approach we estimated the relationship between macroeconomic indicators (GDP levels), business turnover rate, and furlough rates. We then used different GDP growth forecasts to infer future rates of jobs at risk of redundancy, loss of hours, and loss of pay, ie, demand for furlough (see notes for further methods information). We modelled three scenarios – low, high, and core – which use the lower quartile, upper quartile, and median projected GDP growth rates in the independent forecasts collated by the Treasury in July 2021. The relationship between GDP and business turnover is monitored by the ONS, with the two indicators relatively strongly correlated (see figure 2, below). The relationship between the deficit in business turnover and the rate of uptake in furlough is similarly well correlated, albeit with some significant variations in sensitivity by sector. Having controlled for sectoral variations in how business activity levels relate to furlough demand in our model, we arrived at three estimates of the number of at-risk jobs at the end of September 2021 (ie, the end of Q3), with a core estimate via our macroeconomic approach of 830,000 jobs.

Our second approach is grounded in epidemiological forecasts. We used research from Warwick University conducted for the government’s pandemic advisory committee as a proxy for economic activity. Warwick’s modelling suggests step four of unlocking (ie, 19 July onwards) could see the level of mixing and mobility increase by only 87% from those seen during full lockdown. We took early February 2021 as our reference for the level of furlough seen during ​‘full lockdown’ and assumed the level of demand for the furlough scheme beyond 19 July would be 13% of this figure. This gives us an estimated furlough demand after 19 July unlocking of around 660,000 jobs.

Implicit in our approach using epidemiological models is the assumption that demand for furlough remains tied to case levels, connected via the resulting impact on voluntary mobility and mixing restrictions. As such, the variance over time will depend on how the summer surge in cases unfolds. Most of the government’s scientific advisors expect hospital admission numbers to peak in August and be on the decline by the end of September when the furlough scheme is scheduled to end. In this case, the above estimates of furlough demand at the close of the scheme could be too high, as they assume a higher case rate. On the other hand, this approach may miss some of the economic impacts of the global pandemic and restricted international travel, which are less directly linked to community-level mixing and mobility. In addition, if a winter wave were to develop, voluntary social distancing could strengthen, leading to weaker-than-expected demand and greater risk of loss of jobs, hours, or pay.

From the range of tests and scenarios we have explored above, we estimate there will be furlough demand at the close of the scheme in September 2021 from 450,000 to 1.1m jobs, with a core estimate of 660,000 jobs (see figure 3, below). As a number of these jobs are only using the furlough scheme on a partial basis, the full-time equivalent (FTE) number of jobs at risk of redundancy, loss of hours, or loss of pay is likely nearer 500,000 (range 340,000 to 830,000). This number seems reasonably well aligned with the rises in unemployment typically suggested between Q3 and Q4 by forecasters – typically a rise of 200,000 to 400,000 people — as not all of the jobs left unsupported by the furlough scheme will translate into unemployment.

The impact of increasing employer contributions

From the start of August, enrolling a worker on the furlough scheme will require a 20% employer contribution to wages for unworked hours. NEF’s furlough model (described here) has the power to test the cost-effectiveness of the scheme at different levels of government and employer contribution. This weighs the costs to a business of enrolling a worker on the scheme against the future savings of avoiding re-recruitment to fulfil the role when business activity returns. Our model suggests that requiring a 20% contribution from employers means it will not be cost-effective for around one third (ie, 250,000) of the jobs that might otherwise have made use of the scheme over its remaining two months. The people in these jobs are therefore at risk of redundancy, loss of hours or loss of pay.

Aligning policy with risk

The present furlough scheme end-date is arbitrary, and unlinked to any material changes in policy or the wider impacts of the pandemic on UK society. Raising employer contributions significantly reduces the scheme’s effectiveness just as cases are high and voluntary social mixing and mobility restrictions are holding back economic activity. Setting this end-date well before the expected end to either the global pandemic or voluntary social distancing seems unwise, and risks unnecessary social and economic damage, especially with the spectre of new variants still on the cards. Indeed, the UK may well face a further wave of cases this winter.

The government should announce an extension to the furlough scheme and roll back the increase in employer contributions. In the first instance, this extension should run until a realistic end point for voluntary social distancing, suggested by academic sources as the end of 2021 – though the date should remain reactive to emerging developments. In the short-run, it would seem that the business impacts of the pandemic are too widespread and complex to justify a sector-specific extension to furlough, but there could be an argument for grading the generosity of a future scheme according to need based on some kind of sectoral and/​or business revenue test.

Having bought some time with another short-term extension to the furlough scheme, there is an opportunity for the government to follow in the footsteps of many European nations and establish a new, permanent, short-time working scheme. Like the furlough scheme, this would allow firms experiencing economic difficulties to temporarily reduce the hours worked while providing their employees with income support from the government. It should also allow furloughed workers to use their subsidised non-working hours on training, with a priority for industries that may never recover to pre-pandemic levels of output. This could be aimed at building resilience in the UK economy and preparing us for what will undoubtedly be a rocky few years of climate disruption, re-alignment of trade, rapid decarbonisation, and potentially future public health emergencies.

Notes

The ONS’ Business Insights Survey (BICS) provides estimates of business turnover and furlough broken down by high level sector. Each data collection wave of the survey spans a two-week period. Business turnover data is presented in intervals ranging from ​“turnover has increased by 50%” compared to normal expectations for this time of year to ​“turnover has decreased by over 50%”. From these intervals NEF calculates an estimated single figure for the overall level of sectoral turnover as a percentage of the level expected during normal times using the method applied by the ONS at regular intervals throughout the crisis. Once calculated, this figure allows calculation of the proportionate level of furlough demand for a given level of missing turnover (against normal expectations) in a given sector. Having established the relationship between turnover and furlough demand in each sector, NEF applies this assumption to forecasts of future business turnover based on macroeconomic forecasts. Specifically we calculate the level of ​‘missing turnover’ from UK GDP forecasts collated by HM Treasury. Our lower forecast represents the lower quartile of the Treasury’s forecasts, our core the median, and our upper the upper quartile. These forecasts tell us what proportion of the ​‘missing’ activity (compared to pre-crisis levels, ie, Q4 2019) which will return by the target date of the 30 September. Our simplifying assumption is that each sector will see different absolute levels of growth, but the proportion of activity which will returns over the period will be similar across sectors. This leads to the most ​‘crisis-affected’ sectors seeing the highest growth rates, as would be expected following full unlocking, and the least affected seeing much lower rates of growth.