The Coronavirus Job Retention Scheme (JRS) has been a major policy success. Paying 80 per cent of the wages for 6.3 million jobs has made it possible to ask people to stay at home to save lives. And it has prevented an almost unimaginable rise in unemployment.
The scheme’s £8 billion price tag, far from being a problem, simply reflects how desperately needed it was and is. But the decisions to come about the JRS are much more complex than its unprecedented, but ultimately relatively straightforward, introduction.
The priority should be to do nothing rash. Arguments that we should rip the JRS plaster off immediately forget that Britain is already heading for unemployment levels not seen in more than 25 years. Crucially, the sectors that normally take on the unemployed after a crisis are the ones shedding labour this time. After the financial crisis, hospitality and non-food retail accounted for over a fifth of employment entries from unemployment, despite making up just 10 per cent of employment.
But the JRS also cannot continue as it is until we’re back to normal. As the lockdown begins to be lifted, we want to encourage some economic activity to safely take place. But this will be a long road. Policy makers should not be thinking in terms of bouncing back to an old world, but optimising policy for a messy interim dominated by social distancing. And because the timetable for adapting the lockdown is highly uncertain, so necessarily must be the timetable for JRS changes.
The trade-offs involved in phasing out the JRS are difficult. For individuals, we want to minimise unemployment while also avoiding long workless periods on furlough that do not lead to a successful return to a previous job. Firms meanwhile face big uncertainty about the level of demand for their output as they reopen. Going too fast could force them into bigger-than-necessary lay-offs. Go too slow and worries about weak demand become a self-fulfilling prophesy.
Against that difficult backdrop, policy makers should focus first on some easy wins. The JRS needs to move as soon as possible to supporting partial furloughs, where workers can do some work even if not returning to previous hours. The increased risk of fraud should be addressed with more significant fines and aggressive naming and shaming of firms abusing the system. The scheme in its current form should be maintained for those who cannot work as they comply with the test and trace regime in the long months ahead.
The government should reduce firms’ uncertainty by moving away from the current month-by-month JRS extensions. All firms should be told they will have access to the current JRS until the beginning of August for workers already on furlough, and access to the scheme in some form until at least the end of September. Within that broad timetable, decisions on starting to change the JRS should be based on both our success in lifting lockdown measures, and that feeding through to economic recovery.
The debate on JRS reform has focused on whether paying 80 per cent of wages is creating the wrong incentives for individuals to work, with proposals to cut that rate swiftly. But if a firm asks their employee to return there is already a very strong incentive for them to comply. Not doing so means losing 100 per cent of their earnings, not 20 per cent.
What matters instead are the incentives for firms to bring back workers, given employers will be the ones taking this decision. So when the phasing out of the JRS begins, we should learn from the experience in many European countries and ask firms to contribute towards the costs of remaining furloughs – rising from 10 per cent of previous wages over a number of months.
The JRS’ one-size-fits-all model also needs to change. Treating sectors differently is difficult politically and in practice. But this crisis is at its heart a sectoral one, with differences in initial output falls by sector almost six times as large as during the financial crisis. The pace of supply adapting and demand recovering will also vary hugely, with the large hospitality sector particularly slow – so the phasing-out timetable should be slower for the sectors most affected by ongoing social distancing.
Some rough justice will inevitably arise, but if this approach is not followed a much more cautious timetable for making changes to the JRS will be needed. Otherwise, the risk is that a large proportion of the estimated 1.7 million hospitality workers currently furloughed are laid off en masse.
Another key danger is that a worker is furloughed for a very extended period and does not ultimately return to their job. So where the JRS is extended for a longer period, the financial incentive to take another job, rather than just to return to an existing one, becomes increasingly important. On this basis, there is a case for reducing the £2,500 cap on furlough payments, and longer-term support for firms like pubs coming via grants or equity stakes, not the JRS.
Taken together, the changes we suggest could limit the cost of the scheme to £48 billion. The JRS has done the lion’s share of the work over the first phase of this crisis, but in the next phase we’ll need to dial up more traditional fiscal stimulus and significant back-to-work support, such as job guarantees, additional training and the creation of green jobs. We need to recognise that we’ll be dealing with high unemployment for many years to come.
Policy makers face a range of very tough decisions in the months ahead relating to the JRS. The government should plan for a clear, transparent phasing down of the scheme with the timing entirely conditional on the (very uncertain) pace of health and economic developments. And as the furlough scheme steps back from its current central role, other forms of policy must step up. That is the way to help Britain navigate the difficult times that lie ahead.