Scarring effects of Furlough

By Professor Paul Gregg, University of Bath

The Chancellors furlough scheme is a dam holding back a torrent of unemployment. A long history of research has shown that open unemployment has sizable costs to workers after they have returned to work – called scarring. But these scarring effects will not hit all workers equally – they will primarily impact those from the younger generation due to the important role of work experience in the process.

Furlough vs unemployment

For prime-age and older workers, the main cost of unemployment comes from the dislocation from the existing job. The quality of the replacement job match is lower because a range of experience and knowledge is underused. This can be specific knowledge to the firm, industry or occupation or the seniority/responsibility in the job role. Long-term unemployment sees greater loss of application of this knowledge and experience as jobs are further away from the old position across the domains just listed. Some of this cost of dislocation is recovered by later job moves but typically not that cost associated with long-term unemployment. Here then furlough is totally different than unemployment as there is no such dislocation. This also represents the economic value of keeping so many hard hit businesses afloat. It would take a lot of time for replacement businesses to start-up and then to grow to be as productive in their use of labour as those that would be closed without furlough and other supports. These supports are thus limiting the economic destruction of productive potential that a deep recession creates.

For younger workers, the story of unemployment is less about the lost job, which are generally lower paid entry positions. Rather it is the lack of accrual of the crucial work experience which attracts pay rises and allows job moves/promotions which attract even large pay rises. A years tenure in work for a young person generates pay growth 5% above that for an older experienced worker (more after one year in a job than 5 or so and at younger ages) and a job-to-job move generates around 12%. This is how young people progress through the labour market and build careers. Older workers also get pay rises when moving jobs and at short tenures but they are less common and smaller in magnitude. Here then furlough is likely to be very similar in its effects to unemployment. People are drawing a salary but not actually gaining experience or promotion opportunities.

Thus for older workers with extensive tenure in their current post, furlough should not result in the costs of unemployment but it will disrupt the gaining of experience and potentially job moves that are so essential for young people.

The outlook for the younger generation

In a bad recession youth unemployment and the proportion of young people not in work or education often rise to 25 to 30%. Upwards of 20% accumulate substantial periods (a year or more) out of work between the ages of 18 and 25. Now furloughing of young people has been very common, partly because of the sectors at the heart of the lockdowns but also because of their lower seniority. A million young people were furloughed in early July (the earliest I have found giving an age breakdown) – some 20% of the total at that time – whilst just under another million were not in work or education. This was around 30% of all young people either on furlough or out of work and college. Among those aged 18-24 it was 35%. By the end of October young people on furlough fell to 350,000 but is no doubt higher again now. The year of Covid overall is thus likely to have seen 25% of young people not in college not gaining normal work experiences, very much in line with a normal recession.

The better news is that young people in similar situations do recover a substantial portion of these wage loses. Graduates in a normal recession do not suffer a lot of unemployment but do get work in lower status and paying occupations, losing 3% pay growth per year in a suppressed labour market (normally for 3 years after a recession). But they do see faster earnings growth after a recession ends, recouping about half the losses. This is the likely situation for today’s Covid generation of young people. Provided of course, that the end of furlough is not associated with an explosion of youth unemployment.

The policy response to youth unemployment is a programme like the new Kickstart programme to give that missing experience. But whilst good number of places are promised by firms, there have been nearly no actual starts because of Lockdown. This can’t help until furlough ends. Rather it is making sure of a strong recovery from the Summer that is the only prescription that can limit the damage of lost work experience of young people through the pandemic.