How to wind down the furlough scheme while protecting people in poverty

The furlough scheme has provided huge support to people’s incomes during unprecedented times last year. At its peak it paid the wages of almost nine million workers, and it has so far prevented a huge wave of unemployment. With vaccines now being rolled out quickly, this is the right time to chart a course for phasing out the furlough scheme.

In the next few weeks, the Chancellor should give businesses certainty of the level of support that will be available in future. He should tie changes in the scheme to phasing out of restrictions rather than extending the scheme for another arbitrary time- period. As the economy reopens, the scheme should encourage businesses to bring back workers part-time, while ensuring that any business instructed to close or severely restricted by public health restrictions should have continued access to the full scheme.

The furlough scheme has so far achieved what it set out to

Supporting people’s incomes wasn’t the only, or even the most important, aim of the furlough scheme. The primary intention was to keep workers attached to jobs that were likely to come back after the public health restrictions were lifted.

Doing so is important to preserve ‘matching capital’, where workers have skills suited to the job they were in. It would also avoid huge hiring costs for businesses having to start hiring a whole set of staff again post-pandemic. Keeping workers attached to these jobs should speed up the post-pandemic recovery.

The furlough scheme has performed this role surprisingly well. It has supported the majority of jobs in the sectors hardest hit by lockdowns and social distancing requirements – at its peak supporting three quarters of jobs in hospitality and two thirds of jobs in arts, entertainment and recreation. Back in July, with the furlough scheme expected to end at the end of October, the OBR predicted nearly one in eight of the workforce would be unemployed by the end of 2020. Instead, we reached the end of the year with one in twenty unemployed.

The chart below shows that this support has been targeted at people most at risk of poverty. The scheme has protected many more jobs in sectors with high rates of in-work poverty before the pandemic than sectors with lower rates of poverty.

It would be a mistake to withdraw the furlough scheme too early

Withdrawing support too quickly would lead to an unnecessary spike in job losses in those sectors that have been offered most protection so far, and undo many of the successes of the scheme. The OBR and Bank of England both forecast a spike in unemployment if the furlough scheme ends in April, as currently planned. But the OBR also predicted that many job losses can be avoided if the furlough scheme maintains support until the economy is nearly back on its feet.

Last year we found that low-paid jobs in close-contact sectors are most at risk from winding down the furlough scheme too early (Sandher and Innes, 2020). The risk of job loss was highest for women, those with work-limiting disabilities, the youngest workers, and ethnic minorities, in particular the Bangladeshi and Pakistani communities.

Our work also highlighted why protecting these jobs through the health restrictions is so vital. In most recessions, a job being lost indicates that it might not be viable in the long run so it’s better to focus on supporting people into new ones. But in this COVID-induced recession, we found no relationship between the sectors where jobs were most at risk whilst health restrictions were in place, and the growth of that sector pre-COVID. Whether jobs are at risk now is not a good indicator for whether jobs are viable in the long run.

It would also be a mistake to extend the furlough scheme indefinitely

While the furlough scheme has supported a huge number of viable jobs through the health restrictions, it is probably also still supporting a minority of jobs that won’t come back (Pope, Dalton and Tetlow 2020). Withdrawing support too late risks keeping people in jobs that will not reappear and slows the necessary adjustment to the post-COVID economy.

It won’t help people in jobs that aren’t coming back to keep them furloughed. It would be much better for them to invest in skills that would enable them to move into new opportunities. In May last year we called on the Government to invest in training and learning opportunities for workers who are furloughed for prolonged periods to support this, but it was an opportunity not taken.

As vaccine rollout allows loosening of health restrictions, the objectives of the furlough scheme need to adapt

As the economy opens back up post-COVID, markets will begin to give signals about which furloughed jobs are coming back and which aren’t. At this point, the scheme should be designed to encourage businesses to bring workers back from furlough and allow jobs that aren’t coming back to be lost.

The Chancellor should set out three objectives that charting a course to wind down the furlough scheme needs to achieve.

• First, minimising unnecessary unemployment, by continuing to protect jobs that are viable in the long-term but remain restricted in the short-term.
• Second, minimising the costs from the inevitable unemployment that will arise from winding down the scheme, by incentivising employers to bring workers back as soon as is feasible, and phasing out protection for jobs that are unviable in the long-term. At the same time, policies to create new job opportunities should be ramped up.
• Third, provide businesses with certainty about the support that will be in place in future. Instead of another extension for a set time-period, providing businesses with certainty is best achieved by setting out clearly what level of support will be available with each level of health restrictions, and a course for how that support will be phased out once restrictions are lifted.

How to chart the future course of the furlough scheme

In the coming weeks the Chancellor should chart a course for winding down the furlough scheme that gives businesses certainty of the level of support that will be in place according to decisions that are made on health restrictions. We recommend:

1. As long as a business has to close or is severely restricted by social distancing requirements, it should have access to the full furlough scheme in its current form.

The Chancellor should retain the ‘full’ Coronavirus Job Retention Scheme – the ability to furlough a worker full-time, on 80% of salary up to £2,500 – for as long as parts of the UK or sectors remain locked down or instructed to close. If different nations, local areas or sectors are under different restrictions then different levels of support would be available through the furlough scheme.

Parents and carers of children whose schools or childcare settings are forced to close, or bubbles are collapsed, should remain able to access the scheme for as long as this is a possibility.

Eligibility for the ‘full’ scheme should be limited to three categories of business:

• those that are legally instructed the close;
• businesses who predominantly trade with businesses legally instructed to close; and
• businesses whose operation is severely limited by ongoing health interventions (such as work at home guidance).

Large businesses in the second and third categories would only be eligible if they can prove severe impact on their operations by completing a Financial Impact Test – based on turnover and similar to that proposed for eligibility for the Job Support Scheme ‘Open’.

2. Changes in the furlough scheme should be tied to the phasing out of restrictions rather than arbitrary time periods.

As we exited the first National lockdown, the Government set reductions in support to set time periods rather than linked to stages of the pandemic. Whilst this offered some certainty to business, it meant the Government had to change course when the second and third wave of the pandemic struck. Instead, the Government should tie changes in levels of support for furlough to the lifting of economic and public health restrictions.

Removing restrictions should follow and lag the easing of health restrictions. For example, the Government could announce that the ‘full’ furlough scheme will be kept in place for two months after the initial easing of national or local lockdowns, at which point most employers would only be able to access the ‘part-time’ furlough scheme. Eligibility for the part-time scheme could be gradually tightened inline with further easing of restrictions.

3. As businesses re-open, policy should encourage the use of part-time furlough to bring more workers back part-time rather than fewer workers back full-time.

The current policy allows workers to be furloughed part-time, with employees paid the full amount for hours worked, and the Government paying 80% of unworked hours. This should be retained for most employers after access to the full-time element of the furlough scheme is limited and should only be fully phased out once social distancing restrictions are completely lifted.

To be eligible for part-time furlough, workers would have to work a minimum number of hours - we would suggest starting at 20% of the employees’ original hours. This minimum number of hours of work could again be gradually increased in line with the easing of health restrictions, at first to 33% and then further to 50%.

Unlike the winding down period last year, we do not think business should be required to contribute to the costs of unworked hours. Doing so would mean it is more expensive to bring two workers back on 50% of their hours than a single worker back for 100% of their hours, creating a disincentive to use the scheme to bring workers back part-time. Government had previously argued that the disincentive was offset by the Job Retention Bonus of £1,000. This policy should not be re-introduced as it had a large deadweight cost (a lot of the benefits went to businesses who would bring workers back anyway) and was widely criticised as a poorly designed policy.

4. When the furlough scheme begins to be wound down, this is the optimal time to ramp up measures to support job creation and dynamism of the labour market.

The Government should consider again measures we recommended last year including reducing the cost of hiring new workers by increasing the secondary threshold at which employers start paying national insurance contributions and measures to create a new generation of good jobs in adult social care.