The Coronavirus Job Retention Scheme must adapt to aid the UK's economic recovery

The economic damage inflicted by coronavirus and the subsequent lockdown of nearly all developed economies has been huge. It has provoked a similarly unprecedented response from governments. In the UK, as in some other countries, labour market support policies make up a substantial part of these programmes. The UK is expected to spend at least £80bn, 3.7% of annual GDP, on extra support for the unemployed, self-employed and workers who have been furloughed by the end of October.

These support measures have been broadly successful – so far – in keeping workers in jobs and meaning the unemployment rate in the UK has remained far lower than in other similar countries, as a new Institute for Government report highlights. The Treasury's next moves will be critical as the lockdown is eased across the UK.

The UK has been successful in limiting increases in unemployment

The share of the workforce on Universal Credit (UC), the UK’s main support for the unemployed, has increased from 9% to around 15%. But this increase is dwarfed by the changes in Ireland and Canada, where over 30% of the workforce have claimed support payments.

There has also been a large rise in unemployment in the US. Its unemployment insurance programmes, which were claimed by less than 1% of the population pre-crisis, are now used by nearly a fifth of the American workforce.

What Canada, Ireland and the US have in common (as we discuss in our paper) is that – in the early stages of the crisis – they channelled a large amount of public money into more generous benefits for unemployed people, rather than focusing on wage subsidies as the UK has done. UK chancellor Rishi Sunak announced plans for a generous wage support scheme (the Coronavirus Job Retention Scheme, CJRS) early and made clear that the government would do “whatever it takes” to support businesses. That scheme is now paying the wages of almost a quarter of the UK labour force. Other countries’ wage subsidy schemes were delayed (as in Canada) or failed to pay low-wage earners more than unemployment benefits (Ireland and the US). This has been a crisis where government action has been instrumental in funnelling economic damage, and the UK has been successful in pushing more employees towards the CJRS rather than UC.

The generous furlough scheme could impede the recovery

In practice, this has meant that when companies were unable to keep an employee working, they were more likely to furlough them in the UK through the CJRS, whereas in Ireland, Canada and the US they were more likely to fire them. This puts the UK in a good position for now, as valuable links between employers and employees have been preserved. But there is a risk that it could impede the UK’s economic recovery. As long as the CJRS covers a large fraction of wage costs, people could be encouraged to stay in jobs that have no long-term future, slowing down the process of workers moving over to businesses with better prospects as the economy gets up and running again. The CJRS may merely be delaying job losses, rather than avoiding them altogether. The crucial challenge for the government will, therefore, be managing the transition from the CJRS to normal functioning of the labour market. 

In some ways the CJRS is well-designed for the recovery phase. Since employers can only claim the subsidy for workers who are furloughed, claims should naturally dwindle as businesses are able to reopen and demand for their goods and services returns: they should have an incentive to get their employees back to work as quickly as possible. In this respect the UK scheme is unlike those in operation in Australia, Canada and Ireland. In those countries, employers have been able to claim wage subsidies for employees even if they have continued to work. That means the deadweight cost of those policies could become very large as those economies recover because the money will increasingly go to businesses that are operating normally and are well able to stand on their own two feet.

But, by offering employers a stark choice between generous government subsidy for furloughed workers and full wage costs for those brought back, the CJRS could have created a disincentive to businesses reopening as the crisis passes. Sunak’s plan to adapt the scheme from July, so that it tops up the wages of workers brought back part-time, will help.

The government will face tough choices over which businesses to support 

The Treasury is clearly eager to ensure that the CJRS does not simply keep businesses on life support if they have no long-term future. This is why the chancellor will phase support away from the end of August and stop it altogether at the end of October.

But further government action is likely to be needed. As restrictions are lifted and many businesses and sectors return to more normal operations, the chancellor will face growing calls for additional help for those sectors still heavily impacted by the need for social distancing. The Treasury will face difficult decisions about whether it is right for the taxpayer to tide these industries over or whether the economy would be stronger by letting them go under and helping workers to find employment elsewhere. Universal Credit has held up well in this crisis – supporting those newly made unemployed. But it is not designed for times of high unemployment. Other policies – investment in retraining or financial benefits for gaining a new job – could be needed to deal with any longer-term jobs deficit.

As demonstrated already in this crisis, the government can wield a lot of power in shaping how the economy responds to coronavirus. As the lockdown eases, and businesses come out of hibernation, the government will now need to use that power to shape the nation's economic recovery. 

This piece was written in collaboration with Grant Dalton