X Close

Centre for Education Policy and Equalising Opportunities (CEPEO)


We create research to improve the education system and equalise opportunities for all.


Unemployment, the Coming Storm: Where we are, Short-time working, and Job creation

By IOE Editor, on 13 October 2020

 By Professor Paul Gregg, University of Bath

Cold Turkey – or Chicken Licken?

Before the Chancellor’s recent winter package of measures, Andy Haldane, the prominent member of the Bank of England Monetary Policy Committee (MPC), called that it was time for the UK economy to go ‘cold turkey’. That is to stop the financial support (or fiscal stimulus) from central government to business. In another poultry analogy, he argued that recently the economics and business community is acting like ‘Chicken Licken’, always believing that the sky is about to fall in since the pandemic started, whilst there were far more positive signs out there than appreciated. Andy Haldane is a decent economist and a decent bloke and his views should be considered thoughtfully and not dismissed. But in the rapidly shifting world of the pandemic things already look far worse than three weeks ago.

The Chancellor did not take Andy’s line wholesale but his Winter Economic Plan was far smaller than the previous summer stimulus to preserve jobs and in a different league to that back in March. The package essentially offered more of the same through to next April but at a lower cost to the Treasury while for firms it was the opposite.

Levels of Support

To give a broad sense of the level of support, in March a worker on £24,000 a year (£2,000 a month), a little below the typical (median) wage, cost the firm nothing to keep on the books. Now (October) the firm is paying 20% of the wage, so £400, for a furloughed worker to do no work. But part-time furlough is allowed and so a half-time worker costs the firm £200 a month in pay for hours not worked. This is the last instalment under the original scheme.

The Job Retention Bonus (JRB) added in the summer to protect jobs into next year offers a one-off £1,000 payment in January, irrespective of hours worked. To this has been added, from November, a new Job Support Scheme where the firm only pays 1/3 of the cost of hours not worked through to April but at least one-third of normal hours must be worked.

Thus between November and January, this combination of supports means a representative worker working half-time (or above) costs the firm very little since they qualify for the new scheme and the JRB. But for a worker not working at all in a firm that is not legally required to shut, the cost to the firm is £5,400 in total for them to do nothing, as they are not eligible for the new scheme and firms pay all the wage costs. Where firms are legally required to shut, the Chancellor has just added a new measure where the worker will get 66% of normal wage at no cost to the firm (though this is down from 80% in March-Oct period).

So up until January, part-time work-sharing is strongly encouraged. But after the generosity of the package declines to cover just 1/3 of the wage costs of hours not worked, before ending entirely in April.

For Chancellor to take the Haldane view and make no new Economic Plans then:
• He would be expecting firms will be able to have workers on or above half normal hours from November, to be working almost full-time from February and back to full working by April as all job preservation support ends. In addition, in April the extra support in Universal Credit ends cutting £20 a week (£1000 a year) from the budgets of those not working or working but with low family income.
• This would mean that pretty much the entire economic stimulus to the economy and efforts to preserve jobs end pointedly at the same moment. So the economy will have to be back to near normal before April, with the heart of the economy healthy and the hard-hit sectors in recovery. Although they will have shed some workers. The economy is thus weened off support from February and goes Haldan-style cold turkey in April. This would also be implicitly saying that the government can no longer offer more support than this.

Here then the interpretation of the Treasury’s position is ‘that’s your lot, guv’. The alternative view is that the Chancellor is kicking the can down the road and awaiting events before announcing the next measures.

Should we expect a Spring Economic Plan?

Whilst the government has made a complete hash of the health response to Covid-19, the Chancellor was doing well on the economic side. His responses were timely and proportional, with first the furlough scheme, then part-time furlough. The VAT cut and Eat out to Help Out looked sensible to get hospitality and related sectors trading again as we emerged from Lockdown (although it now seems certain that it helped start the second wave of Covid-19 cases). The Job Retention Bonus offered ongoing financial support to stretched firms whilst incentivising work-sharing. It did so in a very flexible way too, not requiring reduced hours of work just encouraging to use short-time working over redundancies, especially for lower-paid jobs. After October, firms were being paid to not sack workers, not for specified cuts in hours. To this has been added a smaller package which works well to support job retention until February.

But from February, support rapidly ends unless Rishi announces a Spring Economic Plan in December or January. And if this happens what should it look like?

There are two obvious points to make first:

1. The new Job Support Scheme (JSS) is less generous than previous support packages but the country is entering a phase with rapidly increasing Covid-19 cases and fresh local Lockdowns of increasing severity by the week. Across most of Northern England and much of Scotland and Wales, the winding down of support is at profound odds with the worsening health situation. The economic support and health-based restrictions are no longer in sync. There is massive dissonance here.

2. The Chancellor has designed the Job Support Scheme (JSS) to work with the Job Retention Bonus (JRB) for at or above half-time working from November and close to full-time from February. Then in April, the ending of all job protection and cuts to Universal Credit will create a substantial economic hit in the Spring. In normal recessions, the ending of fiscal stimulus measures comes a good year after the recession has ended and as recovery is underway. Austerity (there is always a degree of austerity) starts two to three years after the recession has ended and builds up. Lockdown saw economic activity drop 25%, but the improvement since should not be viewed as recovery, just re-opening. In August, the economy was still 9% down on pre-crisis levels. This is the starting point from which we judge recovery when lockdown pretty much ended. Given the second wave of the virus and related restrictions it seems likely now that the recovery will not start before Christmas, the ending of support between February and April will then prevent any recovery. Ending support before the recovery has started is very bad economics.

The Spring Economic Package: Beyond Job Preservation

There is great value in preserving jobs as, beyond those with very low levels of productivity, they have productive value that is hard to quickly recreate. Plus as people become fearful of job loss, they cut spending to reduce debt or increase savings. Maintaining consumer confidence and hence a recovery next year, hangs on employment. However, as many people will lose their jobs and some sectors will not return fully to pre-crisis working levels any time soon, there needs to be a broadening in the focus to cover both job creation and preservation. The government has done next to nothing around job creation so far. Any Spring Economic Package has to move beyond preserving existing jobs.

Job Creation

Job creation requires a further fiscal stimulus tightly focused on employment, especially on jobs suited for groups at high risk of unemployment such as the young and less well educated.

The government has announced the bringing forward of £8 billion pounds of infrastructure spending. This is sensible policy-making as it boosts activity and infrastructure spending has low import content and substantial multiplier effects on the rest of the economy. £8 billion is not very much, however. Spending on repairing roads etc. has the advantage of getting started quickly but more green action, alongside loft insulation, would be desirable. Infrastructure takes time to boost the economy: Much larger investments (offshore wind farms / tidal power) in green energy take far longer to get moving but have similar multiplier effects into the wider economy and meeting long-term needs. The Prime Minister made suggestions along these lines in his conference speech but the action has to start now for any benefits to be felt by 2022.

Lowering Employers Wage Costs:
More targeted support for employment could come by raising the earnings threshold at which employer NI payments start by £5,000 (from around £10k to 15k). This is then more valuable for lower paying jobs, which means young workers and part-time jobs which are half-time or more (employers pay no or very little NI on short hour part-time working). It also supports entry jobs and thus most of the sectors hardest hit through the Lockdown. In sum, it offers a fiscal stimulus focused on employment in general and for target groups and sectors. At the margin it provides incentives to recruit workers as labour costs are reduced and again in the sectors/groups where it represents a larger share of labour costs. It is however, not targeted beyond that. It would be worth £650 a year per worker or £20 billion to the Treasury.

Further targeting:
There are two ways of gaining greater focus and reducing the cost. First, would be to apply the raising of the NI threshold only to young workers (18-24) but this reduces the potential power for job creation in the wider economy. It may also be possible to target on areas affected by area Lockdowns for periods of say 6 months, for firms that can make clear location of their workers, which is easy for small firms, and such local NI cuts may well be best focused on small businesses (500 workers or less).

The other way to improve targeting is to raise employer NI rates at the same time. Raising the NI by 2% from the current 13.8 would cut the cost of the initiative in half. This higher rate might be capped at £50,000 annual salary (the Upper Earnings Limit for employee contributions) to stop NI costs rising for higher paid jobs. Having less earnings covered by employers but at a slightly higher rate thereafter focuses the benefits very strongly on lower earning jobs but obviously reduces the wider economic stimulus.


For the Haldane (cold-turkey) view to be right, the economy in the Spring will need to be in strong recovery and existing supports can be withdrawn safely. However, the virus is very much not going away right now and the health crisis in the run up to Christmas looks severe.
The reasonable prognosis for policy planning is that in January economic activity will still be at least 5 to 6% below last February’s peak. Then if government supports are wound down rapidly, a Spring recovery is implausible.

A further fiscal stimulus will, therefore, be desperately needed and should go beyond job preservation to job creation. Working through employers’ NI offers a route for an employment targeted fiscal stimulus, honed on the types of employment most needed at this stage of the economic cycle.

The connection with Andy Haldane here is that the Chancellor may only be willing to borrow more if the Bank of England is willing to undertake fresh Quantitative Easing, buying up the government debt. Andy Haldane’s statements suggest that he at least would not support such a move. The arguments against further QE are either it is not needed (which seems extremely unlikely now) or that it is storing up inflation for the future when too much money will be chasing too few goods. Right now expecting QE to create inflation at some unknown future date feels a lot more Chicken Licken than a Spring of rising unemployment.

My money is on a Spring Economic Plan package and one with a wider job creation focus. The Soviets used to have 5-year economic plans. In this crisis, ours are just 3 months apart. A little more medium-term policy thinking would be nice but the initiative lies with the Bank of England as much as the Treasury.

Leave a Reply