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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.