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Economic impact of coronavirus: the challenges of recovery Contents

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2Avoiding long term unemployment

43.One of the critical challenges facing the Government is combating long-term unemployment. In the OBR’s central scenario in its Fiscal Sustainability Report 2020, unemployment would peak in the fourth quarter of 2020 at 11.9 per cent.57

The Unemployment rate: scenarios versus March forecast

Source: Reproduction of Chart 2.9 in OBR, Fiscal Sustainability Report , July 2020, p39

44.The Bank also projected a significant increase in unemployment in the near term to 7.5 per cent, however it forecasts unemployment gradually declining from 2021 onwards.58 In its recent Monetary Policy Report, the Bank observed that the “unemployment rate took seven years to return to pre-recession levels after both of the past two recessions”.59

The Coronavirus Job Retention Scheme

45.The Government’s Job Retention Scheme, which subsidised workers’ wages up to 80 per cent, was lauded by witnesses as successfully preventing sharp rises in unemployment in the early stages of the crisis.60 Government data published in July shows that up to the end of June: 9.4 million employees had been placed on furlough; 1.14 million employers had made at least one claim; and the total claimed was £26.5 billion.61 The Scheme will be wound down in October and changes were implemented to reduce the amount paid by the Government from August. From the first week of August, employers had to start paying national insurance and pensions contributions and for September and October, Government contributions were reduced to 70 per cent and 60 per cent respectively.62

46.Witnesses expressed concerns that unemployment would surge once the Government stopped subsidising wages. Lord Darling warned, “we need to get ourselves into the frame of mind where we are thinking about 1980s levels of unemployment.”63 George Osborne also suggested the same, noting that: “[u]nemployment did rise in 2008, 2009, 2010 and 2011, but we never faced the kind of structural unemployment that we saw in the 1980s”.64 Torsten Bell suggested that there were a number of characteristics of this crisis which meant that unemployment was going to rise more than it did in the previous recession of 2008. He argued that in that recession, the economy experienced a large sterling depreciation and an inflation spike, causing a fall in real wages, which meant that unemployment did not pick up as expected. He also pointed out that the sectors that contributed to the highest job growth in the last crisis, hospitality and non-food retail, had been the hardest hit in the current recession so would not be able to perform the same role in creating jobs this time round:

after the financial crisis, they [hospitality and non-food retail] were 10 per cent of the jobs but they were 22 per cent of the move from unemployment into work after the crisis.65

Source: Office for National Statistics, Unemployment rate (aged 16 and over, seasonally adjusted), Last updated 11 August 2020

47.Several prominent businesses have already announced redundancies. British Airways wishes to cut up to 12,000 job roles.66 John Lewis has put 1,300 staff at threat of redundancy.67 Even sectors less affected by the crisis have announced job cuts. HSBC is announcing cuts of 35,000 staff worldwide.68

48.However, Dr Tetlow told us it was uncertain what proportion of the workforce furloughed would end up unemployed and that it would ultimately depend “in the longer term, on what structural changes have happened to the UK economy as a result of the coronavirus, so which bits of the economy and which businesses are no longer long-term viable”.69

49.Many witnesses recognised that the Government faced a daunting challenge in maintaining a balance between preventing unemployment from rising sharply but allowing some labour market flexibility to enable workers to move from shrinking sectors to growing sectors in the economy. The former Chancellor, Rt Hon. Philip Hammond, observed:

There is always a tension with the desire to protect employment, so there will be a tremendous political pressure in this recovery to not let people become unemployed and to not let companies fail. We have to balance that against what we know from previous downturns, which is that the best economic outcome is to get the restructuring that is necessary done quickly, not to try to protect failed businesses, but to facilitate the people who work in them moving on and having good employment prospects for the future.70

50.Professor Low argued that “the job retention scheme just prolongs the time until the adjustment will take place”, and that a general wage subsidy scheme would be preferable.71 The Governor of the Bank of England said in August that he didn’t think it was right “to be locking the economy down in a state that it pre-existed in” and the time was right to end the Job Retention Scheme in October.72

51.The Trade Union Congress wanted a further extension to the Job Retention Scheme on the grounds that a lot of businesses would still face reduced demand due to social distancing in place due to the virus. They asked for a further extension of furlough beyond October “for a more limited group of businesses and workers”.73 The National Institute of Economic and Social Research suggested that the end of furlough should be determined by economic recovery rather than an arbitrary deadline. In a press release, it stated that in their modelled scenario analysis:

Unemployment would have stayed lower had the government extended the furlough scheme beyond the end of October. This would have been a relatively inexpensive measure, and by preventing a rise in long-term unemployment might have paid for itself.74

52.In evidence to the House of Lords Economics Affairs Committee, the Chancellor noted that extending the furlough scheme to just certain sectors is administratively difficult as “there is an entire supply chain for those companies and that in practice it is very hard to distinguish between businesses”.75 However, Paul Johnson, Director of the Institute of Fiscal Studies argued that though it was difficult for himself to gauge practical difficulties, it ought to be possible to:

identify those firms that have some employees in particular sectors and get them to self-certify how many are in the sectors that are trying to be targeted. After all, this whole scheme is dependent, to a very large extent, on self-certification by employers at the moment.76

A Plan for Jobs

53.The Chancellor’s Plan for Jobs announced a number of measures aimed at addressing the risks of rising unemployment:

• Job Retention Bonus–a one-off payment of £1,000 to UK employers for every furloughed employee who remained continuously employed through to the end of January 2021;
• Kickstart Scheme–a £2 billion fund to create “high quality” six-month work placements aimed at those aged 16–24 who are on Universal Credit and deemed to be at risk of long-term unemployment.;
• new incentives for employers to take on apprentices–a new payment of £2,000 to employers in England for each new apprentice they hired aged under 25, and a £1,500 payment for each new apprentice they hired aged 25 and over, from 1st August 2020 to 31st January 2021;
• an additional £111 million for traineeships in England to fund work placements and training for 16–24 year olds, £32 million funding over the next 2 years for the National Careers Service and £101 million additional funding for young people to study for vocational qualifications;
• enhanced work search support–£895 million to enhance work search support by doubling the number of work coaches in Jobcentre Plus before the end of the financial year;
• bringing forward of £5.6 billion of national infrastructure project “shovel ready” schemes.77

54.We heard some criticism of the Job Retention Bonus Scheme. Robert Chote observed that a large proportion of that Scheme would go to employers for workers who they would have paid anyway and thus this would be a deadweight cost.78

55.The Chair of the Federation for Small Businesses, Mike Cherry stated on 2 September 2020 that the Kickstart Scheme was not designed with small businesses in mind:

The Kickstart scheme aims to help young people into work but many small businesses will be disappointed to see today’s announcement which feels more aligned to the needs of larger businesses.

Without further work, the scheme will leave many without any employment support after waiting for it for so long. Crucially it is more difficult to access for those hiring fewer than 30 roles through the scheme, who as it stands will need to find intermediaries. There is currently no guidance for how to become an intermediary and how they will operate the scheme.

To hire 30 individuals is just beyond the means of most small businesses, many of which have far fewer employees or don’t have the HR support on hand to introduce that number of new employees.

The time it will take to hire these 30 employees across several small firms could take months and result in increased costs for small firms at a time when they need our support the most.79

56.Some witnesses told us that the quality of vocational training in the UK was poor and improving its quality was crucial to both improving employment outcomes and output.80 Paul Johnson observed that the Youth Training Scheme in the 1980s had such a poor reputation, there was some evidence that it led to a decline in employment prospects for those who participated in it.81 Ms Bridget Rosewell from the National Infrastructure Commission said:

In my whole career, we have been spending time saying we do not have a good enough vocational training system. I cannot really answer the question as to why in all that time we have not been able to. I wish I could give good answer for it. I do not know how.82

57.Philip Hammond argued that UK had “very poor levels of intermediate technical education.”83 Professor Low told us “we are not actually serious about training the bottom 50 per cent of the population” and that the Government should be making a commitment to a “five-year plan on how we are actually going to stop the dependency of young people on the hospitality and the retail sectors”.84 Lord Darling pointed out that it was not the Treasury but other Departments, such as the Department for Work and Pensions and the Department for Education, who were responsible for running vocational training and retraining schemes.85

58.We believe the Chancellor was right to start measures to combat long term unemployment in July. Rising unemployment becoming structural and permanent is a critical risk arising from the crisis.

59.As the crisis moves beyond full lock-down, it is important to effectively target assistance to those businesses and individuals who need it. The ability of labour to move from sector to sector will not be a painless process and will be dependent on the growth of sectors matching the shrinkage of sectors. The Government should set out how it will manage the transition to mitigate the crisis and prevent exacerbating further inequalities that undermine the “levelling up” agenda.

60.A large proportion of businesses in sectors such as hospitality and leisure that are suffering most from social distancing may still have a viable long-term future at the end of October. It is not clear to us that the Job Retention Bonus, which all businesses are eligible for, is value for money, given that most of the funds will be spent on workers who would be retained anyway. The Chancellor needs to carefully consider whether a targeted extension of the CJRS and/or other targeted support measures might be required and to explain his conclusion.

61.It is vital that workers made redundant have the opportunity to reskill. We heard evidence that the poor reputation of schemes in the 1980s actually reduced participants’ employment prospects. Even though the Treasury is unlikely to be responsible for delivering vocational or reskilling schemes, given the role of these schemes in reducing long term unemployment, we recommend that the Treasury ensures that their quality and reputation is monitored. We recommend an evaluation of these schemes every six months afterwards to assess whether they genuinely increase job prospects.

62.The Government also needs to make sure that the requirement for employers interested in offering fewer than 30 Kickstart roles to apply through a representative organisation does not make the scheme inaccessible to SMEs and charities.

An unequal crisis

63.We also heard that different groups of people faced varying prospects of unemployment, thus opening up further inequalities in the UK’s economy.

Low paid

64.A Resolution Foundation survey found that nearly one-third of lower-paid employees had lost jobs or been furloughed, compared to less than one-in-ten top earners.86

Young people

65.Many witnesses expressed concern about how young people would be affected by the crisis. Torsten Bell said that “the younger workers, particularly the very youngest, 18 to 24, [ … ] face the biggest job losses and furloughing to date”. He described a U-shaped impact, “where the over-60s and people in their 20s have slightly higher risk of furloughing and job losses than people in the middle of the age range”.87

66.Dr Tetlow also pointed out that young people at the tail end of their education and on the cusp of going into the labour market were likely to be “badly affected by the poor state of the economy “ and that going into “a poor labour market can have lasting scarring effects on people’s earnings opportunities”.88 Shortly before the Chancellor announced A Plan for Jobs in July, Torsten Bell observed, “All our income support schemes are supporting previous incomes, not potential future incomes”.89

Mothers

67.A study by the IFS found:

• Mothers were more likely to have quit or lost their job, or to have been furloughed, since the start of the lockdown. In all, mothers who were in paid work in February were 9 percentage points less likely to be currently working for pay (either remotely or on-site) than fathers.
• Compared with fathers, mothers were spending less time on paid work but more time on household responsibilities. Mothers were doing paid work during two fewer hours of the day than fathers, but they did childcare and housework during two more hours each. Mothers combined paid work with other activities (almost always childcare) in 47 per cent of their work hours, compared with 30 per cent of fathers’ work hours.
• The differences in work patterns between mothers and fathers had grown since before the crisis. In 2014–15, mothers were in paid work at 80 per cent of the rate of fathers; now this was 70 per cent of the fathers’ rate. Mothers in paid work used to work an average of 73 per cent of the hours that fathers worked; this has fallen to 68 per cent.90

68.Previous IFS analysis indicated that “ gender differences in hours of paid work contributed substantially to the widening of the gender wage gap after childbirth”.91

69.Paul Johnson observed that the disproportionate impact on mothers could potentially have “a long-run effect on [ … ] labour market outcomes and wages” because time spent out of the labour market or working part-time can have significantly negative effects.92

Ethnic minorities

70.Ethnic minorities were also more likely to suffer an economic disadvantage as well as suffering from increased health risks.93 Paul Johnson told us that “Pakistani and Bangladeshi men, are much more likely than others to work in shut-down sectors”.94 Professor Low told us that people from minority ethnic backgrounds were also more likely to be made unemployed than furloughed.95 In April, a poll conducted by BMG for the Independent noted that “people from black and minority ethnic (BAME) households were almost twice as likely as white Britons to report having lost income and jobs.”96

Renters

71.Torsten Bell noted that analysis by the Resolution Foundation showed that renters might have been particularly hit, observing that: “[p]rivate renters are, in general, 50 per cent more likely to have fallen behind on their housing costs since the crisis started, compared to mortgaged homeowners”. He explained this was due to two factors: “[t]he people in the occupations that have been hit hardest by this crisis are more likely to be in private rented accommodation” but also because “[i]t is easier, in some ways, to delay payments for mortgages”.97 A Resolution Foundation survey found that 10 per cent of renters had attempted to negotiate rent pauses or reductions in their rent with landlords but only half of them have been successful, whereas nearly all of the thirteen per cent of mortgage owners who had negotiated holidays with their banks had been successful.98

Adequacy of safety net

72.Those who lose their jobs are likely to often rely on the Government’s safety net, Universal Credit. On 20 March, the Chancellor stated “we will also act to protect you if the worst happens” and announced the following changes to Universal Credit for 12 months “to strengthen the safety net”:

• a temporary increase in both the Universal Credit Standard Allowance and the Working Tax Credit Basic Element by £1,040 a year, on top of the planned uprating;
• a temporary increase in housing support for private renters through Local Housing Allowance (LHA) rates, which were increased to the 30th percentile of market rents;
• the temporary relaxation of the requirements of the Universal Credit Minimum Income Floor;99 and
• people directly affected by COVID-19 or self-isolating in line with Government guidance allowed to claim Universal Credit and access advance payments upfront without the requirement to attend a jobcentre.100

73.In its distributional analysis, published alongside the Plan for Jobs, the Treasury showed how its Coronavirus Job Retention Scheme and Self Employment Income Support Scheme protected incomes of all deciles, and how increases in the Universal Credit increased the incomes of the lowest decile:

Source: Reproduction of Chart 1.A in Impact of COVID-19 on working household incomes: distributional analysis as of May 2020, p6

74.Torsten Bell pointed out that though continental countries might not have implemented schemes as generous as the UK’s Job Retention Scheme, they tended to have “much more generous social insurance-based welfare systems” in the first place.101

Source: Trade Union Congress, Welfare States How generous are British benefits compared with other rich nations, 2015

75.He went on to say that the Government would “have some big choices to make with regard to Universal Credit” and:

There have been increases in the generosity of Universal Credit. It is a big choice: do those remain or do they go next April? The local housing allowance, which was, perversely, based on rents in 2012, is now based on rents today. It seems to me unlikely that we will go back to basing it on 2012 rents as a deliberate policy decision, but that leaves us with opportunities to think about the structure of welfare.102

76.Torsten Bell also pointed out that those newly claiming Universal Credit might also have higher rents than those typically on it. After nine months of claiming Universal Credit when the benefit cap103 was removed, changes to their Universal Credit payment might well mean that they could not afford their rents. He argued that “[t]here will be lots of people with a rent gap not being covered by the state” and “[t]emporarily, at least, increasing the percentage of LHA [local housing allowance] would be a good idea”. Additionally, on the benefit cap, he said, “although people flowing out of work into Universal Credit are exempt from the benefit cap for the first nine months, lots of people are going to rely on this benefit to pay rent for a lot longer than nine months”.104

77.Kate Bell, Head of Rights, International, Social and Economics from the Trades Union Congress also argued that although the Government had changed the regulations for sick pay, so it was available from day one, sick pay levels were still too low and not enough people were eligible for it. She pointed out that “two million people still aren’t eligible because they don’t meet the lower earnings limit. [ … ] so if you are a low earner and you are expected to go to work at the moment—as, for example, many retail workers are—and you are working fewer than 16 hours, you may not qualify for sick pay if you fall sick.”105

78.The Government has recently announced that it is to implement a new payment for people on low incomes in areas with high rates of COVID-19, who need to self-isolate and cannot work from home. Payments of up to £182 will be made to people who have tested positive for COVID-19 and those they have been in contact with. The scheme started in Blackburn with Darwen, Pendle, and Oldham.106

79.The crisis has hit different groups of people unequally. It is also likely that the differences in hours of paid work carried out between men and women observed during the lockdown may lead to a widening of the gender pay gap, especially if the differences in hours worked persist in the months ahead. We recommend that the Treasury publishes an updated version of its distributional analysis in the Plan for Jobs in the next fiscal event, alongside an equality impact analysis of how the recession is impacting different groups (e.g. gender, race, region and socioeconomic status) and the extent to which Government measures are mitigating falls in incomes for those hardest hit. This analysis should also include a breakdown of how unemployment rates of these different groups have been impacted by the crisis.

80.The Government has raised Universal Credit and made it easier to access. However these changes are time-limited for a year. The Government should consider extending the measures increasing the generosity and accessibility of Universal Credit put in place in March 2020. The Government should also conduct a study to examine the adequacy of and eligibility for sick pay, given that poor levels of statutory sick pay will make it harder for workers to isolate when needed.

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