17 November 2021

Farewell to furlough – but where will the jobs market go from here?

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Was furlough the success Rishi Sunak has claimed for it? In very broad terms, perhaps. Unemployment and redundancies were down again in the period July-September, while more timely October data on payroll employment and vacancies suggest that the end of the Coronavirus Job Retention Scheme has not yet led to any significant change in this broadly favourable picture. But we must be careful not to take the wrong lessons from this apparent victory for the big state.

Back in April last year the OBR was predicting a peak of 10% unemployment, but it never reached more than 5.1%. The USA, with no national furlough programme, hit 14.7%. We were more like Germany, where the longstanding Kurzarbeit scheme kept the rate down to a maximum of 6.4%.

In Spring and early summer last year around nine million people in a million businesses were being paid to stay at home as economic activity collapsed. Many businesses could well have gone to the wall in the first lockdown, when nobody knew what was going to happen, when no vaccine was in sight and we were stumbling in the dark.

And we should remember that the Government, having taken unprecedented peacetime powers to close businesses down, had a moral obligation to mitigate the problems faced by firms and individuals.

But furlough was a costly business. It is reckoned to have paid out around £70 billion over the year and a half it operated – on an annual basis, about what we spend on defence. There was, perhaps inevitably, a degree of deadweight in the scheme: some employees were subsidised who would never have lost their jobs in its absence. There was also undoubtedly some outright fraud involved, as auditors are now beginning to discover.

The scheme should have allowed for partial furlough from the start, and for larger employer contributions earlier, both to contain costs and to keep employers and employees clearly focused on the changes taking place in the job market.

It should have been phased out much sooner, rather than being extended twice. Suppressing the normal process of labour market adjustment, for whatever reason, means that, when restraints are lifted, very rapid and rather disconcerting change takes place.

Job-to-job changes are now at a record level as people spot new opportunities in the changed employment market, and are prepared to take risks which they might not have done a few months ago. Such switches will tend to be associated with faster productivity growth over time.

In the short run, however, this means problematic labour shortages in some areas and relative wages having to adjust rapidly. This fuels fears of rising inflation, although these fears are probably exaggerated.

The reconfiguration of the post-pandemic job market needs wages to rise in some areas, while wages in areas where demand has slumped do not necessarily fall quickly. This is not the same thing as an endemic 1970s-style wage-price spiral. The overall increase in wages at the moment is largely a statistical artefact, as the ONS points out in its latest bulletin.

Where do we go from here? The Government has developed a worrying taste for interfering in labour markets, and the apparent success of the CJRS may encourage it to meddle further.

It needs to resist calls to raise wages in those parts of the public sector where productivity has nose-dived with homeworking. It should be very wary of pressure to create new employment rights and to push up minimum wages too far. It should look again at the extra burdens it has placed on the shrunken self-employment sector. It should be looking at ways to loosen occupational regulation and to enable mid-career job switches. It should scrap the failed apprentice levy and instead improve schools and FE colleges. The educational sector is its responsibility: the training needs of businesses are not.

And it should drop attempts to micromanage immigration by attempting to forecast labour shortages. By the time a ‘need’ has been spotted and the bureaucrats have drawn up their quotas, the circus will have moved on.

The vibrant recovery of the labour market which we are currently witnessing ought to be restoring our faith in the recuperative powers of capitalism. New jobs are being created at an amazing rate as companies develop new ways of meeting ever-changing consumer demands, and individuals switch sectors and locations in response to new incentives.

Probably the best thing the government can do at the moment is to stop fuelling speculation about a further possible lockdown. If the idea gets around that we could have another Christmas indoors, some of the current labour market optimism could evaporate.

The Coronavirus Job Retention Scheme was very helpful in keeping the show on the road in the darkest days of the pandemic, but there should be no question of returning to it – and it should not be taken as a precedent for further government interference in the employment market.

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Professor Len Shackleton is an Editorial and Research Fellow at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.