“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where-“ said Alice … “so long as I get SOMEWHERE”
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
In too many ways, the last month has often felt like we have disappeared down the rabbit hole. We wanted to find our way out, with only vague directions beyond to simply keep on walking. But as time passes, a route out of this crisis has started to become clearer—and this week will see the government begin to set out how and when it envisions the lockdown ending. Rightly, the focus will be on how we begin to ease restrictions while protecting public health. But we also need to plan now, and plan well, for how we will exit from the emergency measures that over the last month have staved off an economic disaster.
There can be little doubt that the government’s actions—and the Job Retention Scheme (JRS) in particular—did indeed do just that. If you want to know how bad things could have been, look at the US, where last week we saw another four million people file for unemployment, bringing total claims to 30m and probably pushing the unemployment rate above 20 per cent. By contrast, in the UK, while claims for Universal Credit have soared by 1.4m, they only represent perhaps 4 per cent of the workforce; far more—five to seven million people—will benefit from the JRS.
So in the UK, as in most European countries, the state stepped in to subsidise employment rather than unemployment. But if you add the five to seven million on the JRS to the three million likely benefiting from self-employment support and a further five million claiming out-of-work benefits, then all in all we estimate that around one third of the potential workforce is now not working and receiving government financial support, directly or indirectly. The welfare state has rarely felt so big, or so diverse.
The case for this extraordinary expansion was both economic and social. Without the JRS, firms would have been forced to sack millions of people; as well as the personal hardship this would have inflicted, it would also have done tremendous economic damage, because perfectly viable firms would have had to sack perfectly competent workers doing perfectly good jobs.
The objective of the JRS was to put the economy into deep freeze so that when the lockdown ended, enough of it was preserved that both firms and workers could pick up where they left off. And there was a very strong case for the government to intervene to make this possible—most firms wouldn’t have been able to finance furloughs themselves, because of credit constraints, uncertainty and risk aversion.
But the implicit assumption here is that those firms and jobs will indeed be viable after lockdown; that this is a temporary shutdown without significant and lasting structural change, after which we revert more or less to normal. If that were true—if nothing much had changed in demand or in firm finances—then exit from the JRS could be relatively quick, simple and easy.
However, it's increasingly clear that life will be much messier than this. We won’t be returning to the pre-Covid-19 economy or labour market. So we’ll need new tools to protect and create jobs, while at the same time helping those whose jobs have gone for good to find new ones.
First, the lockdown will have caused significant damage to many firms both in “shutdown sectors” and in the wider economy. Even more seriously, patterns of demand are likely to have changed from the pre-crisis period. New government regulations may change the way we consume some services—if, for example, social distancing is enforced in restaurants. Or individuals may, even without new rules, change their behaviour, for example in their willingness to use public transport or airplanes, and in how they shop and spend their time.
So, as others have pointed out, even after the crisis ends many firms benefiting now from state support will be unviable. The fact that companies like British Airways and Rolls-Royce—which could afford to use the furlough scheme for many months—are making workers redundant is hard evidence that they fear that demand for their products and services is not coming back any time soon. So the JRS in its current form makes sense now, both to protect workers and maintain demand. But over the longer term it’s not good—for individuals or the economy—for people to be stuck in unproductive, often poorly-paid work with few or no prospects for the future, dependent on state subsidy.
That does not, however, mean repeating the mistakes of previous episodes of major structural change, in particular the decline of manufacturing in the early 1980s. If we don’t invest in supporting those out of work to prepare for, find and get back into work, then this could cause lasting damage. These so-called “scars” can have permanent negative impacts on incomes, poverty, health and wellbeing—and they have a cost for the economy and the Exchequer, too.
The good news, though, is that there is also a wealth of evidence around “what works” in recoveries to support those out of work to get into work—and it costs a fraction of what we are spending now on the JRS. And critically, this needs to be focussed not just on those who have lost work in this crisis, but also the three million who were already out of work and who wanted to work, and the at least half a million young people who will be leaving full-time education this summer.
This means, then, that our exit strategy for jobs will need to meet three key objectives: to support firms to recover and increase their output; to support new job creation; and to help those out of work to get into work. We would propose three elements to this strategy:
First, phase out the main JRS. For sectors and firms that are returning to “normal,” there needs to be a clear incentive to increase output and support return to work, so the JRS should no longer support furloughing. For those where recovery is slower, phase-out will need to be slower, but there should be incentives to move to short-time working. And for those where there are likely to be large and lasting shifts in demand, it will need to encourage job creation in growing sectors and to facilitate the movement of workers from declining ones or from unemployment.
How could this work in practice—particularly when it will be hard for the government to know, in advance, exactly which sectors are likely to be hardest hit over the long term, or precisely which firms are likely to be viable? One option would be to end the JRS for some sectors, where a quick return to normality seems likely, but for others to offer individuals and firms a choice—either a lump-sum grant to the worker, or ongoing (but time-limited) financial support for short-time working.
If there was no reasonable prospect that the firm or job would be viable over the medium term, the individual could take the lump-sum grant, easing the hit to their incomes (and to aggregate demand) and giving them time and space to find a new job. But if both agreed that future prospects were reasonable, then they could try to make a go of it with temporary state support. This FSB and TUC proposal, drawn up during the last recession, would be an excellent starting point; it suggests a forward-looking assessment of viability and business need, adjudicated by a business, trade union and government panel.
Second, we need to promote job creation in growing sectors, particularly for those leaving the JRS. As long as the government avoids a collapse in aggregate demand, there will be many such sectors, whether in health and social care, low-carbon industries, or “reshored” production as international supply chains fragment. For expanding firms and sectors, the government should offer wage subsidies, not as under the reformed JRS for existing workers, but for newhires, either of formerly furloughed workers or the unemployed.
And the final prong must be proper investment in employment support for those out of work. The UK has historically skimped on such programmes; even before austerity, we spent far less on active labour market policy than most other developed countries, especially those, like Denmark, recognised as successful in this area. And over the last decade, what capacity we did have has declined as spending on employment programmes has been cut (from nearly £800m in 2016 to barely £200m now). We’ve now got a chance to remedy that; for less than one tenth of what we will spend on the JRS in a few months, we could ensure that all of those out of work had access to high-quality employment support, including a guarantee of a job or training for the longest-term unemployed (along the lines that the TUC has called for).
Unlike Alice through the looking glass, we don’t have the luxury of not caring where we end up. We know where we need to get to, and we know broadly how we will need to get there. However, it won’t be straightforward, and it may not always be popular. The government will have navigate the path between “picking losers” among specific sectors or firms, as failed in the 1970s, or simply letting the market work and throwing firms and workers on the scrapheap, as failed in the 1980s. But it won’t be as expensive—economically or politically—as either pulling the rug out from under the UK labour market by withdrawing the JRS with nothing to replace it, with the resulting spike in unemployment, or by prolonging it to the point that we lock millions of workers in unproductive jobs in unproductive firms. The government was right to be radical in its response to the crisis last month. As we prepare for the recovery, we must be so again.
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where-“ said Alice … “so long as I get SOMEWHERE”
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
In too many ways, the last month has often felt like we have disappeared down the rabbit hole. We wanted to find our way out, with only vague directions beyond to simply keep on walking. But as time passes, a route out of this crisis has started to become clearer—and this week will see the government begin to set out how and when it envisions the lockdown ending. Rightly, the focus will be on how we begin to ease restrictions while protecting public health. But we also need to plan now, and plan well, for how we will exit from the emergency measures that over the last month have staved off an economic disaster.
There can be little doubt that the government’s actions—and the Job Retention Scheme (JRS) in particular—did indeed do just that. If you want to know how bad things could have been, look at the US, where last week we saw another four million people file for unemployment, bringing total claims to 30m and probably pushing the unemployment rate above 20 per cent. By contrast, in the UK, while claims for Universal Credit have soared by 1.4m, they only represent perhaps 4 per cent of the workforce; far more—five to seven million people—will benefit from the JRS.
So in the UK, as in most European countries, the state stepped in to subsidise employment rather than unemployment. But if you add the five to seven million on the JRS to the three million likely benefiting from self-employment support and a further five million claiming out-of-work benefits, then all in all we estimate that around one third of the potential workforce is now not working and receiving government financial support, directly or indirectly. The welfare state has rarely felt so big, or so diverse.
The case for this extraordinary expansion was both economic and social. Without the JRS, firms would have been forced to sack millions of people; as well as the personal hardship this would have inflicted, it would also have done tremendous economic damage, because perfectly viable firms would have had to sack perfectly competent workers doing perfectly good jobs.
The objective of the JRS was to put the economy into deep freeze so that when the lockdown ended, enough of it was preserved that both firms and workers could pick up where they left off. And there was a very strong case for the government to intervene to make this possible—most firms wouldn’t have been able to finance furloughs themselves, because of credit constraints, uncertainty and risk aversion.
But the implicit assumption here is that those firms and jobs will indeed be viable after lockdown; that this is a temporary shutdown without significant and lasting structural change, after which we revert more or less to normal. If that were true—if nothing much had changed in demand or in firm finances—then exit from the JRS could be relatively quick, simple and easy.
However, it's increasingly clear that life will be much messier than this. We won’t be returning to the pre-Covid-19 economy or labour market. So we’ll need new tools to protect and create jobs, while at the same time helping those whose jobs have gone for good to find new ones.
First, the lockdown will have caused significant damage to many firms both in “shutdown sectors” and in the wider economy. Even more seriously, patterns of demand are likely to have changed from the pre-crisis period. New government regulations may change the way we consume some services—if, for example, social distancing is enforced in restaurants. Or individuals may, even without new rules, change their behaviour, for example in their willingness to use public transport or airplanes, and in how they shop and spend their time.
So, as others have pointed out, even after the crisis ends many firms benefiting now from state support will be unviable. The fact that companies like British Airways and Rolls-Royce—which could afford to use the furlough scheme for many months—are making workers redundant is hard evidence that they fear that demand for their products and services is not coming back any time soon. So the JRS in its current form makes sense now, both to protect workers and maintain demand. But over the longer term it’s not good—for individuals or the economy—for people to be stuck in unproductive, often poorly-paid work with few or no prospects for the future, dependent on state subsidy.
That does not, however, mean repeating the mistakes of previous episodes of major structural change, in particular the decline of manufacturing in the early 1980s. If we don’t invest in supporting those out of work to prepare for, find and get back into work, then this could cause lasting damage. These so-called “scars” can have permanent negative impacts on incomes, poverty, health and wellbeing—and they have a cost for the economy and the Exchequer, too.
The good news, though, is that there is also a wealth of evidence around “what works” in recoveries to support those out of work to get into work—and it costs a fraction of what we are spending now on the JRS. And critically, this needs to be focussed not just on those who have lost work in this crisis, but also the three million who were already out of work and who wanted to work, and the at least half a million young people who will be leaving full-time education this summer.
This means, then, that our exit strategy for jobs will need to meet three key objectives: to support firms to recover and increase their output; to support new job creation; and to help those out of work to get into work. We would propose three elements to this strategy:
First, phase out the main JRS. For sectors and firms that are returning to “normal,” there needs to be a clear incentive to increase output and support return to work, so the JRS should no longer support furloughing. For those where recovery is slower, phase-out will need to be slower, but there should be incentives to move to short-time working. And for those where there are likely to be large and lasting shifts in demand, it will need to encourage job creation in growing sectors and to facilitate the movement of workers from declining ones or from unemployment.
How could this work in practice—particularly when it will be hard for the government to know, in advance, exactly which sectors are likely to be hardest hit over the long term, or precisely which firms are likely to be viable? One option would be to end the JRS for some sectors, where a quick return to normality seems likely, but for others to offer individuals and firms a choice—either a lump-sum grant to the worker, or ongoing (but time-limited) financial support for short-time working.
If there was no reasonable prospect that the firm or job would be viable over the medium term, the individual could take the lump-sum grant, easing the hit to their incomes (and to aggregate demand) and giving them time and space to find a new job. But if both agreed that future prospects were reasonable, then they could try to make a go of it with temporary state support. This FSB and TUC proposal, drawn up during the last recession, would be an excellent starting point; it suggests a forward-looking assessment of viability and business need, adjudicated by a business, trade union and government panel.
Second, we need to promote job creation in growing sectors, particularly for those leaving the JRS. As long as the government avoids a collapse in aggregate demand, there will be many such sectors, whether in health and social care, low-carbon industries, or “reshored” production as international supply chains fragment. For expanding firms and sectors, the government should offer wage subsidies, not as under the reformed JRS for existing workers, but for newhires, either of formerly furloughed workers or the unemployed.
And the final prong must be proper investment in employment support for those out of work. The UK has historically skimped on such programmes; even before austerity, we spent far less on active labour market policy than most other developed countries, especially those, like Denmark, recognised as successful in this area. And over the last decade, what capacity we did have has declined as spending on employment programmes has been cut (from nearly £800m in 2016 to barely £200m now). We’ve now got a chance to remedy that; for less than one tenth of what we will spend on the JRS in a few months, we could ensure that all of those out of work had access to high-quality employment support, including a guarantee of a job or training for the longest-term unemployed (along the lines that the TUC has called for).
Unlike Alice through the looking glass, we don’t have the luxury of not caring where we end up. We know where we need to get to, and we know broadly how we will need to get there. However, it won’t be straightforward, and it may not always be popular. The government will have navigate the path between “picking losers” among specific sectors or firms, as failed in the 1970s, or simply letting the market work and throwing firms and workers on the scrapheap, as failed in the 1980s. But it won’t be as expensive—economically or politically—as either pulling the rug out from under the UK labour market by withdrawing the JRS with nothing to replace it, with the resulting spike in unemployment, or by prolonging it to the point that we lock millions of workers in unproductive jobs in unproductive firms. The government was right to be radical in its response to the crisis last month. As we prepare for the recovery, we must be so again.
