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.
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.
- 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.
- 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.
- 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.