Rishi Sunak’s shift in approach could place ‘viable’ jobs at risk

It was only in March that the chancellor said he would do "whatever it takes" to preserve jobs through the coronavirus crisis – but March already feels a long time ago. With the 'cost of Covid-19' to the public finances already standing at £317 billion, as a new Institute for Government report sets out, Rishi Sunak has acknowledged in his winter economic update that this crisis will not be a short-term economic blip.

The newly unveiled 'job support scheme' is the clearest indication of the evolution in Treasury thinking. Despite new public health restrictions coming into force, support for jobs will become less generous. There is a clear rationale for this approach, but it means jobs will be lost this autumn – and that is likely to include some that would have a viable future when social distancing measures can finally be lifted.

The job support scheme is a less generous version of the Job Retention Scheme

The chancellor now wants to protect only ‘viable’ jobs. His job support scheme, to begin 1 November, tries to achieve this by supporting jobs that keep people working for at least a third of their time, and where a business is willing to pay some of the wages for the hours not worked.

While the chancellor unveiled this as a new innovation in a distinctly new phase of the crisis response, in reality it is an evolution of the Coronavirus Job Retention Scheme (CJRS) which has been in place since March.

The main differences are that workers can no longer be fully furloughed but must work at least one third of their contracted hours (this sort of ‘part-furlough’ has been an option since July), and employers must pay workers full wage costs for the hours worked. For the hours not worked, the new scheme means the employer must pay one third of the salary (up from 20% in October) while the government will also pay one third (down from 60% in October).

The chancellor’s new scheme will, by design, only save some jobs

On this definition of ‘viability’, the furlough scheme is currently supporting many unviable jobs. In July, the first month in which part-furlough was an option, only a fifth of the almost five million employees on the scheme did any work at all: the remainder were fully furloughed.

The new scheme will also incentivise employers to keep one person on full-time rather than two people part-time, because the employer has to make a contribution for the time an employee is not working. This is the opposite incentive to the Job Retention Bonus, announced in July, which offers employers £1,000 if they keep a previously furloughed worker on the books until the end of January – encouraging employers to spread the workload among part-time workers. The new UK scheme has also been compared to the German Kurzarbeit scheme, but in this way they are quite different, as the German scheme encourages the retention of workers part-time.

These are intentional features of the scheme rather than bugs: they encourage employers to make decisions now about which employees have a big enough workload and a longer-term future and so should remain on their books, rather than to keep as many workers on as possible. Given that over three million jobs are still furloughed, this means a substantial increase in unemployment is possible – and a potential cliff edge at the end of January, when the Job Retention Bonus period ends.

The Treasury is hoping that taxpayer money won’t be spent on supporting jobs that will never return. And they will hope that any increase in unemployment will speed up the reallocation of workers to more promising firms that have brighter futures – although no extra help was announced to aid those transitions, and job vacancies remain scarce.

The chancellor could have taken a different approach

There is a clear, but risky, rationale to the chancellor’s approach. Sunak is assuming that being able to work at least one third of the time is a good measure of long-term job ‘viability’. That may be a reasonable assumption in most sectors – the share of workers on furlough fell markedly in most sectors over the summer as restrictions were eased. But in those sectors still badly affected by Covid restrictions, such as the arts (where nearly two thirds of jobs remain furloughed, little changed from the peak of the crisis), it may not be. And a job may still be perfectly viable once social distancing measures are relaxed even if there is nothing to do now.

There isn’t an obvious right approach. Some countries, such as Germany, have chosen to extend job support at existing levels of generosity, while others (such as Australia and Ireland) have taken a similar approach to the UK, extending their schemes but on less generous terms.

The chancellor’s aim is support only ‘viable’ jobs, but restrictions on some sectors mean the success of his approach will only become clearer over the winter.