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Official post-lockdown unemployment figures ‘only partial picture’

IOE Editor18 August 2020

By Professor Paul Gregg, University of Bath

August produced two vital sets of data on the state of the economy. Assessments of output (GDP) and jobs. Britain officially entered a recession, though it has been since April when output was 26% below that seen in February. The latest data showed a sharp bounce back as businesses started to re-open in June. But output remained 15% below February’s peak. This is unsurprisingly the worst economic decline, by a big margin, since the second world war.

How can unemployment stay so static?

At the same time it was announced that since the virus hit and economic production tanked, unemployment has not moved at all by June. Also, that total employment has fallen by ¼ of million, the number of employees on payrolls for PAYE tax registration fell by ¾ million and the number of claims for out of work benefits (the claimant count) is up by 1 million. Looking at these makes anyone think that something has gone wrong at the Office for National Statistics. There are massive contradictions here. The reasons how these statistics can all be true get a little arcane but here goes.

How can the data look so good?

In short, from the start of the pandemic and up till June,

  • Around 200,000 older workers decided to retire a bit earlier than planned and around
  • 600,000 People with either jobs (mainly zero-hours contracts) or self-employed stopped earning anything.
  • Around 5 million on furlough pay at any point in time.

None of these count as unemployed and only the 200,000 count as not in employment as they have retired. The others still have employment but no earnings.

Below I explain this in more detail.

  1. Early retirees don’t count as unemployed. The unemployment and employment data comes from the Labour Force Survey and covers the 3 months April to June but there is no sign that things changed much over these months. The story here is that the employment fall was almost entirely among those aged 65+ and again almost entirely among the self-employed. Older people faced with a lengthy shut down of their businesses and other self-employment activities (what are called own account workers), have simply retired. These number around 200,000. In most cases, they were probably planning to retire soon and have just brought it forward. To be unemployed you need to be looking for a new job – if you retire you are not unemployed. Hence the difference between employment and unemployment numbers.
  2. People on zero-hours contracts don’t, either. The PAYE register of employees covers an extra month, going through to July and perhaps 100,000 of the large ½ million discrepancy with LFS employment data. The bigger story is about those who are away from work. Some 7.5 million people are away from work now. Normally this is about 2.5 million which mainly reflects sickness. The 7.5 million figure reflects both higher sickness and those on furlough, where people are still being paid and count as employees in the PAYE system. However, there are a number of people away from work and not on a payroll for tax purposes. ONS estimates that there are 300,000 away from work, and not furloughed, with no earnings. Most are likely to be on zero-hours contracts and with zero hours. These people are employed – they have a contract – just they have no paid work but the will have dropped off the PAYE radar of people earning on firms payrolls.
  3. About 600,000 employed with no earnings The increase in the claimant count is higher still as many self-employed people are claiming Universal Credit to tide them over lockdown. Normally UC requires people to be searching for work – which would make them unemployed – but this has been waived for the pandemic. This means we have a lot of people with zero earnings and claiming benefits but have employment contracts or normally work as self-employed and are not looking for a new job. These are considered employed in official statistics. So by June, we had about 600,000 people who count as employed but without any earnings.
  4. Plus the 5 million or so on furlough by this time.

July: “the first wave of major job-shedding”

In July though the job shedding started, with at least 100,000 losing work (and more if some of those with jobs but no earnings re-started working). Up until the end of July, the economy was partially closed but jobs and incomes were largely protected by the government. This ends in August and September and the real recession begins.

Recommendation: We need to monitor the zero hours/self-employed more.

The anomaly all this highlights is people with a zero hours or self-employment contract who have no earnings are considered employed and hence don’t count as unemployed – the size of this group needs to be monitored. The question is whether these people will restart employment now lockdown is eased.

Recession “in the ballpark of the 1980s”

The main story will be how deep the recession is after lockdown has mostly ended in July. The signs are that this will be in ballpark of the 1980s and the last 2008/09 recessions.

The Bank of England suggest that there will be around 1 million workers losing their jobs, as the economy is still 5% below peak after Lockdown ends. As I have posted before I feel if this forecast of economic activity is right the jobs shakeout will be higher, around 1.5 million, as so many firms are in critical financial condition. The unemployment storm has only just started.

 

A Jobs Rich Recovery

IOE Editor21 July 2020

by Professor Paul Gregg

The package of measures just announced by the Chancellor was bold, progressive and imaginative. It represents the end of Phase 1 to address unemployment, that focused on job preservation. Phase 2, which will hopefully be addressed in September, will be about creating a jobs-rich recovery. This piece is designed to say where we are now and what needs to happen next.

Phase 1 Job Preservation: Holding Unemployment to under 12%

A month ago, I viewed the prospects were for unemployment to reach 14% without major policy responses. This was primarily due to the acute financial distress firms are facing as the Job Retention Scheme was to be wound down. With the recent measures announced by the Chancellor and the relaxation of the social distancing rules, there is now a fighting chance of keeping unemployment below 10% but something around 11% is more likely.

The £30 billion package is first and foremost a fiscal stimulus, designed to be more effective or more timely than general untargeted stimuli.  These would be income tax and VAT cuts and investment in infrastructure. None of these would get into the economy fast enough to prevent a haemorrhaging of jobs this Autumn as the Job Retention Scheme (JRS) ends. Tax cuts by boosting consumption also see a third of their effects going on imports rather than UK jobs. The key elements of the package are designed to keep firms in hard-hit sectors (social distancing and not trading during Lockdown) afloat till next year and a recovery.

The Chancellors announcements were a package of financial support for the hospitality sector linked to sales turnover (the VAT cut) which firms can choose to just bank or to lower prices (along with the vouchers) to increase customer demand. There is a parallel with the targeted package of support for the arts but there it is not related to sales. These sit alongside a retention bonus for the furloughed workers, such that if retained through until January, the firm will receive a cash lump sum per job.

The retention bonus is also heavily a means of financial support to firms who were Locked down. Thus it goes wider than the hospitality sector. Without further support, it was highly likely that the would have been massive job cuts as firms without much trade recently are on the edge of a financial precipice. This could easily have been 10% of furloughed jobs (or around 900,000).  However, it does there more things: first, it in effect extends the Job Retention Scheme through to January. As if workers are retained, the employer costs of furlough through to October are met for full-time furlough and for part-time there is also a contribution to wage costs after this (about 10% of total wage costs for November and December). Second, because of this, it supports firms more if they move to part-time furlough and part-time employment over full-time furlough. This encourages business to hold staff on short-time working, rather than sacking some and retaining others. This is very important. Finally, unlike extending JRS if firms ultimately decide to let staff go before January, they don’t get the bonus. In other words, it is a lower-cost way of extending part-time furlough to October and offering some support after furlough ends, phasing firms back into normal working.

By the end of August, we will be able to see the extent of moving to part-time furlough and what proportion are being retained. Because if you are going to let someone go before January there is no incentive to carry on into September when significant wage costs start to be met by employers. Further, with redundancy notice periods most employers will be announcing job loses of furloughed workers now. There will still be a lot of redundancies in August/September but hopefully, with this move, 95% or so will be retained.

There has been widespread criticism that it is underpowered and firms will decide to shed many workers now rather than see how things look in a hopefully brighter January. Also that it will support many jobs that will not be shed. If firms sack 20% of furloughed workers they still get bonuses for the other 80. It is true that the incentives would have been more powerful if the bonus was withdrawn when firms sack workers. So if they sack 20% of furloughed workers they get no bonuses at all and at 10% they only get £500 per worker retained. The Chancellor was aware of this idea from a number of sources and that he didn’t go for it says that it was not practicable.

This shouldn’t detract from it being a targeted financial support package to keep firms and sectors in acute financial distress, afloat. With positive incentives to get businesses trading (the VAT cut) and to hold onto staff through short-time (at least) working till January (the retention bonus). The package has a lot of positive attributes. All these measures are about job preservation, which is clearly the right thing at this downward stage of the recession, by helping firms through to the expected recovery next year. There comes a point where the focus needs to shift toward new job creation. All the signs are that the Chancellor is planning this Phase 2 to tackling the coming unemployment storm, for an announcement in September.

Phase 2: Job Creation: Getting unemployment below 7% by the end of next year

The more conservative voices in economics are raising concerns about the future level of government debt and the need for tax rises or spending cuts to meet them. Now is not the time for the government to let these concerns prevent further action to get the economy moving and to get unemployment falling next year. There are a number of ways to emphasise this point.

The primary reason austerity was so extended after the 2008/09 recession was that wages stagnated. Nothing generates tax receipts quite like earnings growth. We do not tax wealth and new jobs have a large untaxed Personal Allowance. Pay increases are taxed at a higher marginal rate and are thus more revenue rich. Another decade of pay stagnation and the government debt will be almost impossible to bring down. Pay growth after the 2008-09 recession only kicked in when unemployment fell below 6% in 2014 (the Brexit devaluation blocked this in 2017/18 but it had restarted ahead of COVID). Getting unemployment this low again as quickly as possible is essential to re-start the engine of tax receipts (which flow from pay growth). This is why the next phase of government action has to be about job generation and the deficit needs to wait until unemployment is clearly falling.

In addition, preserving viable firms and hence jobs prevent a huge loss of productive potential in the economy, especially for more productive firms. In this sense acting now is a major investment in the British economy by the government. This is analogous to the scarring effects of unemployment on people’s future earnings and hence productive contribution to the economy. Finally, stimulus measures to get jobs growth will be temporary and interest rates are extremely low and will remain so in a post-COVID suppressed economy. Given the huge economic crisis, this will most likely drive the Bank of England to pursue further quantitative easing by buying up government debt. 

Stimulating Jobs Growth

The next phase will ideally contain three elements, although not all parts need to address all three. The first is that the further fiscal stimulus should be focused on employment (not consumption). As people become fearful of job loss they cut spending to reduce debt or increase savings. Lockdown has forced saving as so much of our normal spending was blocked. So there is potential to get a wave of consumption as things return to normal, provided this isn’t restricted by fear of job loss. Maintaining consumer confidence and hence a recovery next year hangs on employment. The JRS stopped the economy imploding during lockdown but offers no stimulus for next year and the VAT cut for hospitality is very limited.

Second, this stimulus should be focused on employment in the UK (not imports as with consumption). Finally, the employment support should be as far as possible targeted of where it is most needed for a jobs recovery next year. This means on the employment of young people, on the types of entry jobs that the unemployed move into (and then move on to better positions later) and where possible to meeting other objectives such as the acute environmental and housing problems.

The obvious step is to cut employers National Insurance (NI) payments to make employing people cheaper and thus preserving jobs and potentially to boost vacancies when the recovery starts. However, this not well targeted on sectors in most distress or in the areas which are likely to employ the young and relatively low skilled labour who are most at risk of job loss. There are four more coherent responses, the first of which the government has started but could do much more.

  1. Infrastructure

The government has announced the bringing forward of £5 billion pounds of infrastructure spending. This is sensible policy-making as it boosts activity and infrastructure spending has substantial multiplier effects on the rest of the economy. £5 billion is not very much, however. Spending on repairing roads has the advantage of getting started quickly but more green action (alongside loft insulation) would be a programme of green energy production such as solar and where appropriate wind power on public buildings, again quick to get started. 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. Supporting the move to green cars (hybrid/electric) is also attractive as the car industry is in crisis but of course, a lot of such cars are imported. The government should be looking at something more like an extra £40 billion of public infrastructure investment spend over the next two years. Housing must be a major priority. Major infrastructure projects can come with requirements for Apprentices to be taken on. This has been done before but to date, this has applied to firms, not whole sectors. Major housing investments need apprentices in building trades and so the construction sector as a whole needs to be made to step up, rather than just firms winning individual contracts.

  1. Hiring Subsidies

The Kickstart programme seeks to offer work experience to the young unemployed. To maximise the value of that experience, the young person needs to be actively looking for work whilst on it and immediately afterwards. This job search should be supported by a one-to-one advisor. But these advisors should also be engaging employers to take on the youths participating in Kickstart to market them to employers, and this marketing is enhanced greatly if there is a hiring subsidy.  The international evidence on hiring subsidies is positive. It shows how well-targeted hiring subsidies raise employment of supported individuals even 5 years after the subsidy ends. In essence, the announced extra support for Apprenticeships is already a form of hiring subsidy.

However, targeting is central, otherwise, there are large deadweight costs from paying employers to do what they would have done anyway or firms may hire a subsidised worker and displace an existing worker. Such hiring subsidies are also likely to prove valuable for other vulnerable groups such as older workers (55+) and the disabled. Here the problem is less experience than overcoming employer reticence to give people a chance to prove

Such subsidies are often in the form of a holiday from employers NI payments. This automatically means if the employee is let go again then the subsidy stops. The alternative is payments based on the duration of the jobs themselves.

  1. Targeted Employer NI cuts

Hiring subsidies work for helping individuals into jobs but they are not a general support for job creation or a fiscal stimulus to the economy. More general support for employment could come by raising the earnings threshold at which employer NI payments start e.g. £5,000 of earnings, or halved for the first £10k. This is then more valuable for lower-paying jobs, for 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 offers a fiscal stimulus focused on employment and at the margin incentives to recruit workers in the groups were it represents a larger share of labour costs. It is, however, not targeted beyond that.

There are two intermediate ways of gaining focus. First, would be to apply the raising of the NI threshold to all young workers (18-24). An alternative might be a target on sectors where job creation has strong potential and wider longer-term benefits. These would include social care, green industries etc. Of these two and given the problems they will face, a targeted NI cut for young people seems preferable.

  1. Minimum Wages

A closely related issue around labour costs at the lower end and especially for the young is minimum wages. The government has previously accepted the LPC’s recommendations in full, and on 1 April 2020, NLW for those aged 25 rose by 6.2% to £8.72 per hour as we went into Lockdown. The previous Chancellor, Sajid Javid pledged to raise the National Living Wage to £10.50 within the next five years.(from 60% to 66% of median wages by 2025) and to extend NLW to apply to workers aged 23 and over from April 2021 and then to further its reach to encompass all workers aged 21 (currently 25+) by no later than April 2024. Given the jobs crisis and the major unemployment facing young people, this is deeply problematic. Announcing delays in these objectives by say two years is necessary.

There is another more medium-term issue which is company debt. Firms during lockdown will have taken on debt much of it back by Treasury Guarantee and on favourable terms for the first year and beyond for smaller firms (under the Bounce Bank Loans and Coronavirus Business Interruption Loan schemes). The debt is held by commercial banks and firms will have to repay it. Such debt and repayments will reduce firms’ capacity to borrow, invest and grow and hence create jobs over the next few years. How this debt is managed will have a sizable impact on the recovery. It could be written off entirely or part of it could be taken off of banks hands under quantitative easing by the Bank of England. This releases capital but also offers alternative repayment periods and amounts (perhaps writing off part of it – sometimes called a haircut).

Overall, the next phase of the governments approach needs to move from job preservation to job creation. This involves fiscal stimulus focused on employment in the areas where it is most needed to get the unemployed back to work. That is for the young, for entry jobs and areas with evidence of on-going recruitment potential. Reducing wage costs rather than jobs (targeted support through employers NI costs and minimum wages) is an obvious place to explore.

The Coming Storm: Design of Active Labour Market Policy

IOE Editor6 July 2020

Professor Paul Gregg, University of Bath, and Professor Emma Tominey, University of York

The concentration of unemployment on certain groups and the huge costs it imposes on individuals who experience longer durations out of work (3+ months) in terms of penalties on wages and unemployment up to 20 years later means that targeted support is necessary, rather than just waiting for an upturn. There are three forms of active labour market policy that have proven effective: job search support, hiring subsidies and high-quality work experience. These policies tend to work best during periods of economic recovery, while those targeting younger people are less effective, especially when less intensive. This emphasises the need for wider support for job creation discussed here. But there is still a role for active labour market policies alongside macro-interventions. Here we discuss which active labour market policies have been proven to be effective.

Job Search Support

The Work Programme was the UK coalition government’s flagship welfare-to-work programme. This started in 2011 and was replaced in 2015 with a programme targeting those with health issues/disability. Young people who had been out of work for three to nine months would be placed with providers and given support with finding employment. The providers received money for placing the individuals into jobs, with an extra reward for sustained jobs.

Providers primarily used one-to-one job search support with relatively little employer engagement and wider interventions such as training. A provider had a job seeker on their books for two years and on average moved 18% into sustained employment and 25% of younger workers (there has not been a comprehensive analysis of the scheme but this is the most useful piece of evidence). The scheme became more successful over time but this largely reflected the strengthening jobs recovery in this period. While placing 1 out of 4 young into sustained employment over 2 years in a strengthening labour market suggests limited success, the scheme was low cost and these types of job support interventions have generally been found to be successful in the past (as in Gateway of New Deal for Young People). The innovative elements include payments for sustained outcomes and that people who returned to unemployment re-engaged with the programme if within the two year window.

Incentives for providers and employers to hire the young

On top of the Work Programme, the Coalition introduced the Youth Contract which offered subsidies worth £2275 for a full-time post, to employers who recruited a young person from the Work Programme and retained them for at least six months. Take-up was very limited and again the effects modest. Work Programme providers did not have the employer links to support this element well. The international evidence on hiring subsidies is much more positive. It shows how well-targeted hiring subsidies raise employment of supported individuals even 5 years after the subsidy ends. However, targeting is central otherwise there are large deadweight costs from paying employers to do what they would have done anyway. Another scenario is that firms may hire a subsidised worker and displace an existing worker. Targeting is usually done by the duration of unemployment or can create early entry for particular high risk-groups (such as those from a disadvantaged background or with disabilities). Hiring subsidies are often used in conjunction with job search support to maximise effectiveness by marketing the participant to employers. This was not well designed in the case with the Youth Contract, as discussed above.

Offer high-quality work experience

Young people can be taken out of unemployment and temporarily placed into work experience to equip them for regular job entry. The UK 2009 Future Jobs Fund (FJF), which offered 6 months paid (minimum wage) work experience to 18-24 year old Jobseeker’s Allowance claimants raised job entry and reduced time on benefits for the young participants. Two years after starting the six-month programme, participants were 11 percentage points more likely than a slightly older and ineligible group, to be in employment (when tracking was stopped). The resulting benefits broadly offset its costs. These sustained employment gains are good considering that the scheme was running at the worst period for unemployment in that recession (2010-12) and as noted earlier, programmes normally perform best in the recovery phase.

The Future Jobs Fund was replaced by the less expensive ‘Work experience’, offering only up to 8 weeks of unpaid work and focused less on high-quality placements,  instead offering very routine roles. The short-run effects were estimated to be positive and 5 weeks after the placement, employment rose by 6 percentage points for the first wave of entrants in 2011. However, these gains were eroded, declining to 4 percentage points at 1 year after participation and became less effective for later cohorts entering the programme. Although cheap, as no wage was paid, the effectiveness was poor.

Combined Programmes

In the UK, the 1998 New Deal for Young People was compulsory for the young unemployed and offered 4 options of employment placement, education/training place, a place on an environmental taskforce or a place on a voluntary sector equivalent. Its innovation over past schemes was to require job search whilst on placement, offering support in finding employment, which started before the option began, and subsidies for employers hiring the young people. The scheme proved successful, increasing employment by around 5% and its marginal benefits were higher than the marginal cost of the programme. However, the environmental taskforce and voluntary sector options were less effective than the other two, whilst the employment option was the most successful. Drawing on this, the Future Jobs Fund also maintained job search support to help participants move into regular employment.

Another more recent combination programme that is still up and running is the Traineeships programme being offered to those young people on benefits, without the necessary qualifications to start an apprenticeship. It offers work experience and training connected to the job and is designed as a pre-apprenticeship, viewing moves into full-time education or an apprenticeship as positive outcomes. The DWP assessment is that it raised employment by 18% after a year and thus is more effective than the Future Jobs Fund or New Deal employment option. However, moves onto Apprenticeships were less positive and the programme should, therefore, be viewed more as a work experience programme with training than apprenticeship access course. It is, however, very small scale, around 20,000 starts a year.  The government has recently committed to provide 30,000 new traineeships, but operated in an extremely tight labour market it might prove hard to grow to a level needed.

In summary, combined programmes offering work experience preferably with training (as with Traineeships), with required job search and on-going job search support and a hiring subsidy for moves into regular work are effective and must be at the heart of efforts to address youth unemployment. But they are expensive and as such they need to be focused on the most at risk of long-term damage from unemployment. Lower cost programmes for the less seriously in need (or at early durations) should not be lower quality work options such as make-work schemes (e.g. Work experience, Environmental Taskforce or similar), but job search supports with hiring subsidies (for those aged 55+ this is a better option than work placement) or just job search supports.

A Guarantee

Creating a Guarantee must integrate these positive elements of active labour market programmes with Apprenticeships and continuing education (Access Courses), to offer a range of positive options rather than low-quality placements. As the schemes will be hard to grow to the scale needed we would need a two-tier entry system based on durations out of work (not on benefits which is often not the same for young people) with early entry for those with high-risk markers (low education, eligible for pupil premium, living in a deprived area, been in-care, disability etc). For those not yet eligible for this more intensive treatment, the natural step is to create a window of job search support (as with the Gateway in New Deal) and the hiring subsidy before entry into the more intensive programme.

At first sight, it seems logical that interventions should focus in specific sectors such as the ‘Green Economy’ or Information Technology/AI. In essence, trying to guess the jobs being created tomorrow. But this will not be the whole solution to the unemployment problem. There are a large range of other sectors where employment will grow in the next few years – health, social care, education, business services, research and even construction. Also, most job openings that will arise over the next 10 years will not be new jobs but replacements to fill the jobs of individuals who are leaving the labour market for child and other caring responsibilities, moving to different jobs, or for retirement. On average, there are at least 10 replacement jobs for each ‘new’ job and extra job creation is obviously limited soon after a recession.  Rather we should focus intervention on positive destinations and funding should as far as possible be outcome related. The first job a person gets after unemployment will not be the last and so it is the skills, education and on-the-job learning that will help individuals, not the sector the offered job is in.

The Coming Storm: Maintaining Employment through the Recession

IOE Editor3 July 2020

by Professor Paul Gregg, University of Bath 

Lockdown creates a massive hit to the economy but it is the post-lockdown level of activity and in particular levels of financial distress for firms in the labour-intensive (lower productivity) service sector (hospitality, leisure, non-food retail etc) that will determine peak unemployment levels at the end of this year. As highlighted, open unemployment would have been likely to rise from 4% pre-COVID, to 14% without further policy intervention. However, the government has recently announced both a relaxation of 2-metre rule which will help pubs, restaurants, and leisure services to trade more effectively when they open and a plan to bring forward infrastructure spending. Although how quickly this will kick in is less clear. These two measures may well limit the GDP fall (to say 6-7% in the second half of this year) and hence the rise of unemployment could be limited to something more like 12%.

There are three major areas of policy intervention that a government facing a jobs crisis can do. Action at the macro-level to support jobs such as the Job Retention Scheme and also interventions focused on helping individuals which can be broadly split into a) education and skills and b) active labour market policies, though they can overlap. This post discusses the macro-level interventions needed to support jobs.

Macro-Level Support for Jobs

Governments facing a major economic downturn will try to stabilise the economy by pumping resources into the economy through maintaining incomes and hence consumer spending, helping businesses survive the crunch, helping firms to hold onto workers and direct spending. The mix of these should depend on the nature of the crisis being faced, as all recessions differ. The banking crisis on 2008/09 meant that available credit to firms and households dramatically dried up hitting spending both by firms and consumers. It also drove a sharp devaluation of Sterling which helped firms who exported or competed with imports from abroad but pushed up prices further squeezing spending by consumers. Trying to ease this by cutting VAT and hence prices to support consumer spending thus made sense.

This time the problem is not a hit on spending because of a credit squeeze and rising prices, but because of social distancing meaning we are not travelling, going to pubs and restaurants etc. Cutting prices by cutting VAT is clearly not as attractive this time around as prices are not a cause of the spending problem. Further, any consumption boost will include imported goods and hence will not be fully targeted on employment in Britain. A VAT cut is not appropriate for this recession. The obvious alternative is to cut employers’ National Insurance (NI) payments to make employing people cheaper, thus preserving jobs and potentially boosting vacancies when the recovery starts. However, this not well targeted on sectors in most distress or in the areas which are likely to employ the young and relatively low skilled labour who are most at risk of job loss.

There are four more coherent responses, one of which the government has already done and another it has started but could do much more:

First, the key step taken so far has been the relaxation of the 2-metre rule allowing pubs, restaurants etc to operate with 1-metre social distancing. This allows the hardest hit sectors to trade more effectively from tomorrow onwards. This has three key features which make it important. First, it addresses the block on consumers in the way that a VAT cut doesn’t. Second, it eases the financial pressure of firms and, third, it is targeted on the labour-intensive sectors currently at high risk. This measure alone could well have reduced peak unemployment at the end of the year from 14 to 12%.

Second, the government has also announced the bringing forward of £5 billion pounds of infrastructure spending. This is sensible policy making as it boosts activity, and infrastructure spending has substantial multiplier effects on the rest of the economy. £5 billion is not very much, however. Spending on repairing roads has the advantage of getting started quickly but more green action would be a programme of green energy production such as solar and where appropriate wind power on public buildings, again quick to get started. 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. The government should be looking at something more like an extra £40 billion of public infrastructure investment spend over the next two years.

The third element of a jobs recovery package would be incentivising firms to keep more workers on part-time contracts, minimising the long-term impacts of scarring from spells out of work. As businesses can re-open, the full-time furlough becomes redundant and the part-time option that is allowed from July should be the only attractive option. This represents a form of short-time working. As proposals stand, firms start paying employers NI and pension costs from August. They also have to start paying 10% of the furloughed wage in September and 20% in October. This then amounts to 35% of the furloughed wages in total. Under part-time (half time) working, this is around an extra 3% in August, rising to 12% in October, in wage costs per hour worked. This is at a time when they are up against the wall, financially.  It seems unlikely that many will be using this option by the end of September. Rather they will retain some workers to normal hours and lay off the rest to cut costs.

There are two simple alternative tweaks to the part-time furlough scheme to encourage firms to hold onto more staff.

The first is to make government support for furloughed staff capped at a fixed contribution irrespective of full- or part-time furlough status, rather than a proportion of the furloughed wage. The governments contribution to a full-time furloughed worker will fall to 65% of £2000 per month in October or £1300 pm on average (80% of £2500 is the current limit of government support and some workers receive less but it is also supporting employer NI and pension costs) and the firm £700. For a half-time worker this is £650pm and £350 respectively. So a single capped fee of £1000 pm would make full-time furlough far less attractive and part-time correspondingly more attractive. On this basis, the cap could be £1800 in August, £1400 in September and could continue to decline in November and December before ending completely in January.  Such a move would push the wave of redundancies of furloughed staff from the end of August till the end of October or later allowing firms more time to get to grips with the new normal.

The other alternative is for a retention bonus payment to be made for workers still employed by the firm at the end of January. For example, a fixed payment of say £2000-£5000 per furloughed worker could be paid on the condition of the employment continuing for 3 months after the regular payments stop in October if 100% of all workers are still with the firm. At 95% the bonus would be halved and 90% there would be no bonus. Firms would then have strong incentives not to let workers go but to keep them working part-time. This approach could be targeted on firms who are last to leave lockdown (mainly leisure/tourism-related) or be kept general if that is impractical.

Finally, there is value in supporting job creation, not just job retention in hard hit sectors. So closing the Job Retention Scheme and looking at wider job stimulation at some point becomes imperative. As noted, a general cut in employers NI is not well targeted on the jobs at risk or where job creation will be needed to absorb the losses in hard hit sectors. But a more targeted approach, where the cut is better focused by making it larger and on only the first few thousand of eligible earnings, could help a lot. So, for example, employers NI could be abolished on the first £5,000 of earnings by raising the threshold at which payments start, or halved for the first £10k. This is then a targeted intervention, which is more valuable for lower paying jobs, including part-time jobs which are half-time or more (employers pay no or very little NI on short hour part-time working).

As the pressure on the Chancellor to do more to support employment and job creation increase, policy responses need to focus on supporting and creating jobs for lower skilled and younger workers who will bear the brunt of the coming rise in unemployment. Cutting employers NI on lower waged jobs (the first £5 or 10k of eligible earnings) offers the best way to do this. While the government’s infrastructure spending will have powerful stimulatory effects in the wider economy, this should be the governments’ priority for supporting employment.

The Coming Storm: The Long-Term Harm that Unemployment Causes

IOE Editor2 July 2020

By Dr. Jake Anders, Professor Paul Gregg, and Professor Lindsey Macmillan

In our last blog, we highlighted those who are most likely to be affected by the COVID-19 recession – young people, those from disadvantaged areas and backgrounds, and ethnic minorities, to name a few. Unemployment clearly has immediate effects on the financial situation of individuals and their households, as well as on people’s mental and physical health, while they are out of work. However, bad at this is, unemployment has effects that persist even when people get a new job. In this blog post, we discuss the long-term harm that spells, especially long ones, out of work cause. This emphasises the need for policymakers to take action to mitigate such eventualities, which we will address in the following post.

Scarring

A range of studies from around the world have tried to quantify the impact of experiencing spells of unemployment on later outcomes. These have primarily focused on wages and further unemployment, years later, but also non-financial outcomes such as mental health and wellbeing. These legacy effects of unemployment are called ‘scarring’ and may result from either a depreciation in skills and wider human capital, or because employers use previous labour market experience as a productivity signal, although this latter signalling effect may be less marked where it is evidently due to well-known and widespread event such as COVID-19. Understanding this relationship is important in the current climate because it implies there are likely to be significant costs associated with unemployment caused by external shocks, such as the COVID-19 recession.

For employment: Research finds that “men who experience an extra three months unemployed before age 23 go onto experience another extra two months out of work (inactive or unemployed) between ages 28 and 33”. Using variation from local labour market conditions, this is shown to be a causal effect of early labour market unemployment experiences.

For wages: Evidence shows young people experiencing spells of unemployment earn about 6% less than we would otherwise have expected when they do manage to return to work, and around 14% less three years later. Other research from Britain documents similar findings and note that those who manage to go on to have sustained employment are able to reverse this wage penalty. Further work has highlighted the wage decline after job loss for men of all ages is around 10% plus just under an additional 1% for every month spent out of work. The initial impact is regained over the next three years but the duration penalties are not recouped. Longer periods of unemployment really do sustained damage.

The picture here then is that lower job stability and lower wages are connected and both result from unemployment exposure, especially if it is early in the career.

Unequal effects of leaving education during a recession

Much research has also directly considered the effects of leaving school/college during recessions. In the US, research finds that college graduates leaving education into a labour market with a 1%pt. higher unemployment rate earn 7% lower wages: this negative effect declines over the coming years but remains at 2.5% fifteen years after graduation. More recent work finds similar effects from school leaving/graduating in the 2008-09 recession in the UK, noting greater effects for those with less education. It has also been shown that men leaving full-time education into a labour market with “a one-point higher unemployment rate reduc[es] the probability [of being in a job in the next year] by almost 2 percentage points”; results for women are rather more mixed, but are substantially less negative.

By contrast, for those leaving school before college, there are persistent reductions (lasting at least 10 years) in earnings, employment and wages from entering the labour market during a recession, and these are substantially larger for the less advantaged. Recessions make it more likely for workers to begin their careers at lower-paying employers, and a key way that some manage to catch-up over subsequent years with peers who graduated during more prosperous times is by moving jobs to higher-paying firms. However, advantaged college graduates are much better placed to make such moves while less advantaged graduates catch up at a far slower rate, if at all.

Looking beyond wages and employment, work finds that spells out of work for youths have harmful impacts across a range of outcomes, including happiness, health, and job satisfaction, years later. The timing of the unemployment appears to be crucial, however, as spells of unemployment after age 23 have little bearing on later well-being. This emphasises the importance of considering differential effects of the COVID-19 shock on different generations. These findings appear consistently in varied contexts, too, with similar findings of long-lasting effects of unemployment on well-being in the German context and across the early 1990s, the early 2000s and the ‘Great Recession’ period.

There is a smaller related literature on the intergenerational impact of parents’ unemployment experiences on their children’s education and labour market outcomes, suggesting that any economic scarring effects from COVID-19 will have long-term implications beyond the current generation. Evidence from Norway, US, Britain, and Spain all finds negative impacts of father’s job loss on children’s educational outcomes. There’s also evidence that adult children whose fathers were displaced due to firm closures experience wages that were 9% lower than those whose fathers did not experience an employment shock.

Research from Britain and across Europe shows that the impact of high unemployment is particularly pronounced for those from deprived families with low levels of education: disadvantaged young people end up at the back of the queue for jobs when work becomes scarce. Scarring effects on employment and earnings are also shown to be worse for ethnic minorities.

The evidence is clear that unemployment hurts people who experience it, particularly school leavers who feel the effects for years after recessions are over and people have returned to work, in terms of future wages, job stability and health, and even for their children. The evidence is also clear that it is long periods of high unemployment that do the lasting damage. So the policy response needs to be both about job creation, and targeted help for those who experience the bulk of the duration of unemployment. We’ll highlight options in our next blog.

The Coming Storm: Who is in its path?

IOE Editor1 July 2020

By Professor Paul Gregg, University of Bath and Professor Lindsey Macmillan, Centre for Education Policy and Equalising Opportunities 

The impending catastrophic shock to employment highlighted in our recent blog post will come about through a number of different routes. While there is always churn in the labour market from some firms expanding, some contracting, and the start-up and death of firms, the lockdown and coming recession will delay start-up and expansion, as firms wait to see the state of the economy, whilst contraction and closures are accelerated. This is normal in a recession but this time the contraction and firm closures will be intensely concentrated. If this creates widespread fear of job loss, the result will be a deeper, more protracted recession, which could drag down a lot of otherwise-viable firms. Others will be pushed to the edge of existence, needing to lay off workers. So in a short space of time, we’ll see the inflow of new jobs drying up as the outflow of ones lost increases sharply.

This will play out through four main routes listed in the order that they bite as a recession hits:

  1. Recruitment Freeze: Firms, in general, will already have stopped hiring new workers. Real-time vacancies data from recruitment websites says that vacancy levels are 65% down on the same period last year. Plus firms will have already, or be about to, let go of a high proportion of temporary workers and many agency workers.
  2. Delayed Start-up or expansion: New startup and firm expansion will be delayed until late this year or next because of the huge uncertainty around the state of the economy.
  3. Financial Distress: A number of businesses will go under and more widely firms facing acute financial distress will shed workers to reduce costs as happened in the 1990s to a greater degree than in the last recession. Also, many self-employed contractor workers will not be able to start-up again after lockdown.
  4. Strategic Planning: Over time firms assess the likely demand for the goods and services returning and adjust employment accordingly, such as the aviation industry has started doing already.

Who will suffer most?

In terms of the labour market, this will hit a lot of workers but some groups will be especially hard hit, given past recession experiences.

The Young

The young are always hardest hit by the combination of no hiring and temporary contracts and recent starters being let go. Youth (18-24) NEET (Not in Employment, Education, or Training) rates will generally increase dramatically but this summers crop of school/university leavers will be the hardest hit. New graduates will have lower employment but also move extensively into lower-paying occupations (see next section). New school leavers (18/19 year olds) will see a collapse in employment opportunities in July to August. This exclusion from the labour market will damage future wages and employment prospects (referred to as scarring) as discussed in the next section.

Youth unemployment rates are currently 2.5 times that for the whole population. In part, this reflects lower employment among students but even adjusting for that it is twice as high. It was over twice as high through the last recession (18% compared to 8%) and slightly less than twice as high through the 90s recession. Broadly this is what we can expect this time too. If the overall unemployment rate reaches 14%, as predicted in the previous blog post, then youth unemployment could go beyond 25%. If unemployment is lower thanks to the recent announcements on social distancing and other government action then at 12% on average youth unemployment will be above 20%.

Among those aged 18-20 who are not in full-time education, joblessness could reach 50% (this is higher than unemployment – around 30-35% – because some give up looking for work and don’t count as unemployed). Unemployment among young people from ethnic minorities is about 1.5 times that for the White population and twice as high for Black workers and those with Pakistani or Bangladeshi heritage. As youth unemployment becomes widespread in the autumn, these disparities will come down a little. But this still suggests around a third of those young people from ethnic minorities being unemployed, and higher still for Black/Pakistani/Bangladeshi heritage youth. With the Black Lives Matter calls for justice this economic injustice will feature heavily by the end of the year.

Prime Age

Prime aged workers will be less severely affected as firms will want to hold on to experienced and productive workers. Even so, employment rates will contract sharply before recovering. Within this population the focus will quickly concentrate on a number of groups who are generally less advantaged in the labour market. The less-well educated, those in severely affected industries such as retail, leisure and tourism, those for ethnic minorities and those living in more deprived areas, will be far more at risk of long-term unemployment. But those with past unemployment or jobless spells, or already in the low pay–no pay cycle, will be hardest hit. This will include those with physical or mental health issues, ex-offenders etc.

Somewhat less obvious is that those from poorer families in childhood are far more at risk of experiencing unemployment throughout life, even for the same levels of education and living in the same local labour market. But it will bite hardest for those who face multiple disadvantages of growing up poor, living in a depressed local labour market and having lower levels of education. The cumulative effects of multiple disadvantage grow when work disappears. In our recent paper, we showed that Britain (along with Ireland, Belgium and Italy) performs particularly badly in this regard. The downturn will hurt social mobility.

 Older Workers 55+

Older workers are less commonly affected, as firms now use early retirement less frequently to shed workers because of its high cost. However, those who do become jobless will struggle to regain a foothold in the labour market and face long-term exclusion and low incomes even into retirement. Again those with health problems are at higher risk here.

How can we reach those at risk?

Targeting support

The typical way of targeting support is by using duration of out of work benefit claims. This works reasonably well when the flow of claims is spread enough that provision can be mainly dealing with a flow, rather than a large stock. But this will not be the case over the next year. Between September and December huge numbers will be reaching 6 months duration as a very large block. Likewise, next April will see a large cohort arriving at 6 months from those who lose work around October this year when the Job Retention Scheme ends, along with the school leavers. This is on top of the tidal wave (around 1 in 5 of the 1 million) of people who lost work in April/May this year reaching one-year duration of their benefit claim.

We need to get ahead of the wave: identifying those at risk and enrolling them on early effective support programmes, before the duration of spells out of work gets extended.

Identifying need

We need to be able to identify and target those at risk among the youth population. From previous youth unemployment crises, we have a history of using Risk of NEET Indicators (RoNIs).  These are a set of characteristics which collectively predict NEET status for over 6 month’s duration pretty well. The characteristics are combined into a ‘risk score’ based on several indicators, including: Achieving below 5+ GCSE’s incl. Maths and English, Special Educational Needs and Disability (SEND) status, Free School Meals status, School exclusion/suspension or a truancy record, living in a deprived neighbourhood, looked after/ foster children, teen parenthood, young carer, and a record of youth offending.

The threshold of having a set of these characteristics can be chosen on the desired population to be engaged in support programmes. A score of five or six has been used previously. The indicators mostly come from the National Pupil Database (NPD) but given the progress made in linking administrative data (such as the Longitudinal Education Outcomes, LEO) available now, this should be more easily generated and even extended. Health issues outside SEND have not been generally used but could be added through links with health data and likewise markers of youth offending.

For older adults, DWP data on past benefit receipt in the last three years plus educational qualifications, age (55+), living in a deprived area and if possible health issues could serve as the equivalent to RONIs. These will allow us to create an early entry cohort into effective government support programmes before 6 months for the young, or 1 year for the older have elapsed.

The implications of not catching these people early (scarring) and the types of programmes that might be effective will be featured in forthcoming blog posts.

COVID-19, Skills and the Labour Market

IOE Editor18 June 2020

By Professor Andy Dickerson, University of Sheffield 

Unlike the global financial crisis, which was relatively benign in terms of job loss, all the indications are that the Covid-19 pandemic will have significant implications for employment, notwithstanding interventions such as the Job Retention Scheme (‘furlough’) to mitigate some of the short-run impacts on the labour market. Moreover, the signs are that job loss will not be evenly experienced, with certain groups – such as the low paid, young, and self-employed – being more severely impacted. The labour market consequences are likely to be significant for these groups.

Covid-19 will not change the underlying weak fundamentals in the labour market: a decade of stagnant productivity with associated static real wages and living standards. High employment rates and low levels of unemployment disguised a mass of low skill, low-quality jobs with few development opportunities and poor progression for many. These structural challenges are likely to be exacerbated by the consequences of Covid-19 for the labour market.

Undoubtedly, the immediate focus needs to be on young people currently transiting through the education system into employment. The types of jobs that school leavers would typically have accessed – such as entry-level jobs in hospitality and retail providing important early labour market experiences and employment skills – are those most likely to be in short supply. Changes in the patterns of consumption and activity (eg further moves to online retail) seem likely to accelerate the decline in these opportunities. There is an acute danger of a ‘Covid-19 generation’ with permanent and significant scarring effects which will be carried into old age.

Thus, actions should be geared towards supporting those whose education and training has been most disrupted, and for whom employment prospects will be curtailed. For some young people, apprenticeships would have provided skilled training opportunities, but these may be squeezed as firms emerge from the pandemic – one estimate suggests that 80% of apprenticeship starts in April were cancelled for example. However, despite the Prime Minister recently suggesting that “Young people, I believe, should be guaranteed an apprenticeship”, the apprenticeship system cannot be the only way for individuals to access improved vocational and technical skills development after compulsory schooling. Apprenticeship is not ‘scalable’ at the quality that apprenticeship standards require (12 months minimum duration plus 20% off-the-job training), and thus such a strategy runs the risk of diluting the progress that has been made in recent years in this area.

The largest numeric impact in terms of employment loss over the next few months – at least as suggested by the disproportionate use of furlough – is likely to be experienced by those in low paid occupations often with low skills and low-level educational qualifications. For these adults finding themselves unemployed, perhaps for the first time, the post-COVID labour market will be a hostile environment in which their existing skills are likely to be poorly matched with the opportunities that will be available, or that will emerge later as we recover from the COVID crisis.

Equipping both young people and adults for the post-Covid world of work requires short-term and long-term changes to the ways in which the skills and training ‘system’ are organised and funded. We are fortunate in having a recent and very comprehensive review of post-18 education and funding published only last year – the Augar Review. This highlighted many of the structural issues including the systemic neglect of the Further Education (FE) system over many decades and the associated weaknesses in the provision of vocational and technical education. It is hugely important that the conclusions (and recommendations) in Augar are not lost in the immediacy of the responses to Covid-19. They are set to be even more important post-Covid given the likely acceleration in changes in employment structure that have already been anticipated.

For young people completing their compulsory education and training, we need a flexible loans-based system for the 50% who choose not to enter Higher Education (HE) to enable their participation in high-level vocational education and training. But it is often forgotten that the majority of individuals who will be working in the labour market in 2050 have already left education. Opportunities for retraining and upskilling as adults are particularly poor in Britain. There has been a secular decline in workforce training over the last four decades, and adults with the lowest levels of qualifications and skills are least likely to access the few opportunities that are available. For many adults, therefore, there is an acute need to re-engage with education and training. For these individuals, access to shorter-term, more modular, education and training opportunities will be crucially important. Augar suggests that this should be supported with a life-long learning (LLL) account for adult non-graduates. We need a flexible system that will allow individuals to repeatedly access education and training throughout their working lives.

Financing could be supported by widening the scope of the Apprenticeship Levy by extending it to a broader range of firms – the current threshold for paying the Levy is very high and most firms are excluded. Alternatively, as some have suggested, human capital tax credits could be used to incentivise reskilling and training (noting that R&D is of little purpose unless firms have the skilled workers they need to implement new techniques and technologies). Or perhaps a ‘Training and Skills account’ could be established in which firms’ contributions were matched by government Certainly, any revitalisation of the adult training and skills system needs to include active involvement of employers including sharing costs with both individuals and government.

Currently, FE is in poor shape, reflecting the historic underinvestment over decades. Improving its capacity to deliver post-18 skills and training, as well as its attractiveness to students, requires significant investment in infrastructure and staffing, as well as funding. This would be a good area for fiscal stimulus – one with clear long-term benefits.

Some have suggested that there should be focussed interventions in specific areas such as the ‘Green Economy’ or AI. But trying to guess the jobs of tomorrow – ‘picking winners’ – is difficult and can have unintended consequences. Moreover, most job openings that will arise in the next 10 years will not be new jobs, but will be replacement demand to fill the jobs of individuals who are leaving the labour market for child and other caring responsibilities, moving to different jobs, or retirement. On average, there are at least 10 replacement jobs for each ‘new’ job. Upskilling workers to be able to move into these opportunities is key.

Individuals will increasingly need to be flexible and resilient over the course of their working lives, and to be able to adapt and change occupations through reskilling and retraining. We need a training and skills infrastructure that will enable them to do so. It seems clear that the need for this has been accelerated by Covid-19.

 

Unemployment: The Coming Storm

IOE Editor17 June 2020

By Professor Paul Gregg, University of Bath

What we Face

Covid-19 has already produced a dramatic shock to the Labour Market with unemployment welfare claims in UK rising 800k in April and HMRC records suggesting that employee numbers had fallen 1.7% by May. But the Job Retention Scheme is holding back a much larger surge in job losses. The question is: What do we now face for the second half of this year?

Historically, there have been very different experiences, in terms of GDP and employment contractions, in past recessions. In the 2008/09 recession job loss was small relative to the large reduction in economic activity. At a decline of over 6% of GDP, it was a severe recession. But the employment rate shrank by just over 2.8 percentage points (73.0 to 70.2% of working age population in work). By contrast, the 1990s recession saw employment fall by 4.5 percentage points when GDP shrank by just 3%. And the 1980s recession saw a 5% GDP decline and a 6 percentage point decline in the employment rate. There is thus huge variation in the extent of employment falls relative to GDP declines in each recession, from employment falls being half the size of GDP decline in 2008 to 50% bigger in the 1990s.

Predicting what’s to come is hard. The UK economy contracted by 20% in April (after 5% in March) but this is driven by Lockdown rules and does not reflect the underlying economic position. It will be clear how things look after Lockdown from July and through the second half of the year. The Bank of England suggests that over the year as a whole, the contraction will be 14% – more than twice as severe as the 2008/09 recession. The OECD is a bit more optimistic, predicting a contraction of just under 12%, with activity around this level in the second half of the year and still 4 to 5% down in the first half of next year. Both organisations suggest unemployment will peak at just over 9% at the end of this year, a rise of just over 5 percentage points.  They and most other forecasters expected this to be like the last recession with the employment fall (unemployment rise) around half of the GDP fall.

This raises the key question of what shapes the difference between employment and economic activity through recessions?

The first factor is the conditions required for firms to lay off large numbers of workers. Firms first respond to economic shocks by hiring freezes and not renewing temporary contracts. They are more reluctant to sack experienced and knowledgeable workers. They only shed labour heavily when they are in acute financial distress to avoid going bust. And some, of course, don’t survive. The crucial issue is how much financial distress are firms in and how long will they need to get back to near normal trading conditions. If this is acute and persistent, then employment will be hit hard.

The second factor is which sectors are hardest hit? If it’s highly labour-intensive sectors (such as retail, hospitality and leisure) then we would expect to see a larger shock to employment than GDP. In the 2008/09 recession, the first factor had little impact. We saw corporate profitability fall by less than a fifth. Corporate profitability was sustained in large part by the very large currency devaluation which meant exporting firms and those competing with overseas firms in domestic markets were able to maintain profitability.

The 1990s recession was driven by Norman Lamont rapidly and unexpectedly hiking up interest rates to defend the Pound. Consumer spending fell sharply and corporate profitability fell by a third from high levels in the Lawson boom. It was expanding firms who had recently taken on debt who were hardest hit large and those most reliant on consumer spending – labour intensive services. So both factors led to large employment shocks.

What do we face this time? The answer is that contrary to some current thinking, 2008/09 is not a good guide. Rather the 1980s and 1990s recession seem closer to the mark. The employment contraction will be very similar in magnitude (and may well be larger than the GDP contraction).

Even before the crisis, corporate profitability was down 20% on levels in the first half on 2017 and at similar levels to those at the height of the 2008/09 recession. The UK had narrowly missed recession at the end of 2019, before COVID-19 struck. Now, forecasts predict that GDP is 8-10% below peak as we emerge from Lockdown in July and 4% down in the first half of next year.  The absence of, or very limited, trading for some months will have pushed many firms to the edge of existence. Combined with this firms do not know their current trading position nor that which will emerge after lockdown. The Job Retention Scheme has covered wage costs but even so, no revenue means firms have no slack. With no financial buffers, firms will cut jobs heavily to protect the firm until clarity emerges of their trading position after September. The risk for the firm is that holding onto too many workers will push them into to bankruptcy, so firms will err on the side of laying off workers.

Further, the sectors who have and will continue to be hardest hit by Lockdown and social distancing will be the labour intensive sectors of retail, hospitality, leisure and tourism. The only positive is that the recovery is already underway and firms just need to get through to the New Year for a more normal recession situation (output down 4% or so).

The US is maintaining incomes by putting people on greatly enhanced Unemployment Benefits rather than keeping people attached to firms by subsidising wages. It is thus a reasonable guide of what we face here (before the hit to consumption from widespread income falls bites). It has seen open unemployment rise from 3.5% to 13.3% in three months. Firms in the US will often rehire the same workers using UB as a temporary layoff and this has started to happen as social distancing eases but as there is little lockdown in the US the effects of economic shock on jobs are clearer. So given the huge economic shock and the US evidence of its effects on jobs even with major support for demand in the economy, we have to anticipate that the employment rate will fall by 8 to 10% from its recent all time high of nearly 77%. Open unemployment is likely to rise from 4 to 14% without further policy intervention.

As firms can soon start trading, the full-time furlough becomes redundant and the part-time option that is allowed from July should be the only attractive option. This represents a period of short-time working. As proposals stand, firms start paying employers NI and pension costs from August. They also have to start paying 10% of the furloughed wage in September and 20% in October. This amounts to 35% of the furloughed wages in total. Under part-time working, this is around an extra 3% in August rising to 12% in October in wage costs per hour worked. This is at a time when they are up against the wall, financially.  It seems unlikely that many will be using this option by the end of September. Rather they will return some workers to normal hours and lay off the rest to cut costs. The Chancellor has clearly assessed that the scheme needs to end abruptly and accepts there will be an intensely concentrated volume of job shedding in September. This feels like a monumental mistake.

The central point here is that the government has ploughed huge amounts of money into preserving firms and especially jobs. A large part of this will be wasted if the Job Retention Scheme ends abruptly after lockdown ends. Furthermore, the fall out will be massive and the recession risks being more severe and sustained if there is a collapse of demand in the economy from widespread job loss and even more important, widespread fear of job loss kicks in.

 What Can We do?

The country needs two things. First, it needs to get these labour-intensive sectors operational as far as the science allows. Right now, the move to a 1 metre social distancing rule is being debated and seems likely to be accepted. Second, there needs to be a window between the end of lockdown and the full termination of the Job Retention Scheme to get firms through to the better conditions next year when they can more accurately gauge their employment needs.

The policy options are straight forward. The part-time furlough option needs to be a lot more attractive and to last longer, perhaps till the end December. This can be done in one of two ways. Full-time furlough costs the Treasury on average about £2000 per month for each job supported. By October this falls to £1350 for full-time furlough and to £675 for part-time as firms now contribute.  If the furloughed support for the Treasury was cost limited rather than a fixed proportion of salaries at say £900 per month irrespective or full- or part-time, then firms are incentivised strongly to move to part-time furlough and part-time trading. Here 80-90% of furlough wage costs are covered under the part-time option and this is highest for the low wage sectors under most stress.

The other approach would be a retention bonus, such that if all furloughed workers are still employed by the firm at the end of January then the firm receives £1200 per worker (or 3 ½ months of their part-time furlough costs). This could be reduced as the proportion retained falls to just 90% retained.

The coming storm of unemployment will be intense and incredibly accelerated, with almost all of it hitting in April and between August and October as the Job Retention Scheme winds down. The government and forecasters appear to believe that the rise in unemployment will be limited from 4% pre-Covid to around 9% and far smaller than the GDP contraction after Lockdown compared to the pre-Covid period. This would be in line with the last recession. However, firms this time are under far greater financial distress, as they have barely been trading for 3 months, and the hardest hit sectors are labour intensive. So everything points to this being more in line with the 1980s and 90s recessions where the employment fall was in line with that for GDP. If this is the case unemployment will rise closer to 14 than 9%. But this catastrophe can still be averted if changes are made (science-permitting) to the social distancing rules, and to the abrupt termination of the Job Retention Scheme.

10 things you may not know about educational inequality

IOE Editor15 June 2020

1. There are large inequalities in the home learning environment

Families from lower socio-economic backgrounds may experience challenges in supporting their child’s home learning. For example through:

  • Limited access to resources(including tech devices);
  • Lack of reliable and fast Internet connection;
  • Low levels of parental numeracy and literacy;
  • Anxieties towards learning (especially maths).

Current evidence suggests it is important to focus on the quality of children’s home learning, rather than simply the quantity. 

2. Parental inputs affect early child development

By the time children start school, socio-economic gaps are evident in child skills. Exploring the role of various parental inputs, we find that financial resources are an important channel, explaining up to 59% of the effect on child cognitive skills. Parental investments of health behaviours during pregnancy and monetary investments at home explain a further 14% of the test score gaps.

3. Jobless parents invest less money but more time in their children’s learning

Parents out of work, but with otherwise similar backgrounds to working parents, provide lower monetary investments but more time investments in their children’s learning, such as helping with homework. These findings could help guide future social policy aimed at equalising opportunities for children living in workless households.

4. There are large inequalities in the courses that university students attend, by family background.

We examine inequalities in the match between student quality and university quality. We find that students from lower socio-economic groups systematically undermatch, that secondary schools play a key role in generating these gaps, and that while there are negligible gender gaps in the academic match, high-attaining women systematically undermatch in terms of expected earnings, largely driven by subject choice.

5. There is a great deal of inaccuracy in predicted grades.

Only 16% of applicants’ to the UK University system have predicted grades that are accurate. While 75% of applicants have their grades over-predicted, high-attaining, disadvantaged students are significantly more likely to receive under-predictions. Those under-predicted candidates are more likely to enrol in courses for which they are overqualified than their peers. The use of predicted rather than actual grades has important implications for student’s labour market outcomes and social mobility in general.

6. Non-monetary incentives can improve teacher retention.

The French have a non-pecuniary (non-money based), “career-path oriented” centralized incentive scheme designed to attract and retain teachers in French disadvantaged schools. We find this incentive scheme has a statistically significant positive effect on the number of consecutive years teachers stay in disadvantaged schools and decreases the probability of inexperienced teachers in disadvantaged schools to leave the profession.

7. Teacher’s working hours have remained stable despite initiatives to reduce them

Surveys have revealed that teachers in England work far longer hours than their international counterparts. However, contrary to current narrativeswe do not find evidence that average working hours have increased. Indeed, we find no notable change in total hours, work during evenings and weekends over the fifteen to twenty years. The results suggest that policy initiatives have so far failed to reduce teachers’ working hours and that more radical action may need to be taken in order to fix this problem. The article concludes with a discussion of how official data on working hours could be improved.

8. There are large inequalities in who accesses grammar schools

Inequalities exist in who attains places at grammar schools by socio-economic status, with more disadvantaged children far less likely to attend a grammar school than their more advantaged peers. This is true even when comparing those with similar levels of academic achievement. 

9. Private school choices are based on values, not just money

Given the high and rising fees required to send a child to private school, one might think that the decision is entirely connected with financial resources. However, while these remain an important factor, we argue that other determinants are also important. In particular, we highlight the importance of parental values and geographical proximity to choosing high-quality state school alternatives. 

10. Bullying casts a long shadow on attainment

Both type of bullying and its intensity matters for long-run outcomes such as obtaining a degreeincome, and mental health. We can assess the effects of bullying victimisation on short- and long-term outcomes, including educational achievements, earnings, and mental ill-health at age 25 years.