Intervention versus light touch

Perhaps obviously the first question is whether to do something or to do nothing? Traditionally the Conservative Party have been light touch, trusting the market to let firms and individuals make efficient/optimal choices. But efficiency and equity are two different things, and there are strong social justice calls to do something. The May Government’s Industrial Strategy signalled a higher tolerance for the state taking a more active role in the economy, and the announcement of furlough marked a highly interventionist turn.

Status quo versus new equilibrium

Two key questions really arise: Should a scheme seek to preserve the pre-COVID-19 economy so it can bounce back? Or accept disruption as inevitable and actively promote re-allocation from jobs that are gone forever to new jobs? This question really depends on two related things:

  • How long the crisis I expected to last
  • Whether disruption is a temporary blip or permanent shift

Clearly when the crisis started, it was expected to be short. The initial furlough scheme was to last until the end of May 2020, but a series of extensions and tweaks now brings us up to April 2021. As the crisis continues, change feels increasingly permanent. The move to online grocery shopping, streaming rather than cinema and working from home rather than commuting. Of course, some of these trends were already in train, but the pandemic accelerated them. Some claim that small firms have experienced three years’ worth of innovation in the first three months of lockdown.

To date the Government has focused on the status quo, no more obviously so than when ordering everybody back to the office to save the Pret economy (a policy reversed three weeks later). So-called bounce back loans for small business open generous lines of credit to incumbents that might be unavailable to start-ups, though this latter group could hold the keys to the post-COVID-19 recovery. The argument for a new equilibrium will gain traction with each passing day of the crisis. The Economist has recently argued that the US response to COVID-19 has increased entrepreneurialism.

Protecting labour market insiders versus outsiders

Schemes like furlough are very generous to those on them compared to those collecting unemployment benefit. However, both groups true labour market statuses are identical. Someone on median earnings could expect to keep 80% of their income under the original furlough, compared to about 20% on universal credit. That’s a hard pill to swallow for labour market outsiders in the UK.

Protecting jobs versus protecting hours

Again, on the theme of sharing the pain, some schemes incentivise employers to cut jobs whilst others incentivise keeping workers but cutting hours. The proposed job support scheme requires that employers pay for some hours not being worked, which will encourage them to cut jobs. This provision has now been watered down from 33% to just 5% of hours not worked. Cutting hours spreads income out a bit more but has other benefits too. Keeping people in the labour market is good for longer-term prospects. Skills can atrophy, and the longer someone spends out of the labour market, the more difficult it is to get back in.

Simplicity versus conditionality

A simple programme gets assistance out quickly. This was a key advantage of the original furlough scheme. However, it did mean that the Government spent money on jobs that would have been saved anyway. Economists call this deadweight, and the treasury doesn’t like it. The policy did get cash into businesses at a time when they needed it, so perhaps deadweight had some benefits.

Adding conditions (conditionality) makes intervention more bureaucratic but reduces deadweight. As the crisis wears on, proposed schemes are becoming increasingly complicated with extra conditions for geography (what tier the region is in) and sector.

Paying now, versus paying later

Money spent on furlough must come from somewhere, and the Government is borrowing heavily. In the austerity years, there was less enthusiasm for heavy spending, but that has fallen out of fashion, not least because the cost of Government borrowing is so low. The willingness of Government to borrow and spend also meant that the initial furlough scheme garnered broad political support which was particularly important in delivering policy quickly. The Chancellor has been at pains to appear alongside the CBI and TUC to further court broad political consensus.

Ad hoc versus permanent

U-turns are good. In the light of new information policy should be tweaked and schemes extended. But this reduces certainty for businesses and individuals. A permanent job support scheme would provide a framework for policy makers and businesses.

Has the Chancellor got the balance right?

The initial response was robust and timely, gaining political support and getting the money out quickly. Unemployment barely budged over the summer. The BBC were bold enough to ask was furlough a success? The following day, 29 hours before it was due to end, the scheme was extended. Clearly, it’s too early to tell.

At the CIPD we will be exploring job support schemes further in a forthcoming policy discussion paper. We will evaluate the trade-offs and ask whether a permanent scheme - that could be dialled up or down with the severity of a crisis - might mitigate the need for such reactive policy.

About the author

Jon Boys, Labour Market Economist

Jon joined the CIPD in January 2019 as an Economist. He is an experienced labour market analyst with expertise in pay and conditions, education and skills, and productivity.

Jon primarily uses quantitative techniques to uncover insights in labour market data, both publicly available and generated through in house surveying. Jon regularly contributes commentary and analysis of economic issues on the world of work to online, print and TV media. Recent work includes the creation of an international ranking of work quality, analysis of firm level gender pay gap reporting data, and an ongoing programme of work looking at the changing age profile of the UK workforce. 

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