United Kingdom

The mixed success of furlough schemes

Newsletter: The Road to Recovery

Two years ago furlough was barely part of the British lexicon. The pandemic reintroduced the term from the US, where public sector workers are “furloughed” during the country’s periodic government shutdowns. Suddenly, as businesses were forcibly closed to stop the spread of coronavirus, the extraordinary policy of furlough became an everyday term. Put together at short notice, the UK scheme, which came to an end on Thursday, originally paid 80 per cent of employees’ wages.

It is unlikely to leave the British vocabulary, or policymakers’ toolboxes, soon. For all the focus on stimulus and easy monetary policy, job preservation schemes of this kind were the biggest innovation in macroeconomic policy of the pandemic. Given their success in preserving employment through a deep recession, there will surely be demands for a repeat when the next economic crisis hits. The policy, however, came at great public expense and should be reserved for true emergencies.

Short-time work schemes were already common in much of Europe pre-Covid, with the state encouraging employers and workers to respond to temporary lower demand by making up some of the difference between the pay for normal hours and reduced ones. Existing programmes were swiftly beefed up or made easier to access. They were often extended to temporary and agency workers.

Job retention programmes have been deployed at an unprecedented scale. According to the Organisation for Economic Cooperation and Development, about 19 per cent of German workers were on Kurzarbeit schemes in the first part of the pandemic compared with 4 per cent during the financial crisis. In France, a third of workers were put on activité partielle against 1 per cent in 2009. The rich country think-tank estimated that about 50m workers in total had their wages supported by such policies in 2020.

The goal is to preserve the relationship between employers and employees that represent much of the productive capacity of an economy while it is put into deep freeze. The risk is that the schemes preserve, at a very high cost, jobs that are simply not coming back, preventing workers from being reallocated to growing sectors. Indeed, as recently as July more than half of UK aviation workers were still on furlough; they have now left the scheme while many flights are still grounded.

A longer-than-expected pandemic and frequent returns to shutdown, too, meant many workers were not willing to return to workplaces, fretting that the jobs could soon vanish again or re-evaluating, after an enforced leave of absence, how keen they were to return. While unemployment has not risen by as much as expected, labour force participation has fallen in much of Europe and the US and, despite widespread joblessness, businesses face labour shortages; some hospitality workers simply decided they had had enough of long hours and poor pay when restaurants reopened their doors.

Providing blanket support to workers, with few strings attached, was right during enforced shutdowns. There was little prospect of millions of workers switching to the few growing sectors while governments were encouraging them to stay at home. When emergencies come to an end, however, so too should emergency policies. Lessons need to be learned from the experience and that will take time. That should include their potential use for any future pandemics as well as the possibility to limit the severity of more normal recessions. The pandemic has shown that the greatest tool policymakers have is preparation.

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