Ending the Job Retention Scheme too soon risks a second surge in unemployment

The Government should reject calls for a rapid ending of its Job Retention Scheme (JRS), and instead set out plans for a gradual phasing out, with the timing dependent on the lifting of lockdown restrictions, according to new Resolution Foundation research published today (Tuesday).

The report – Getting Britain working (safely) again – says the JRS is playing an essential role for firms and families during the crisis. With at least 6.3 jobs currently being furloughed – at an estimated cost of around £8 billion a month – the JRS has helped the UK to avoid depression-era levels of unemployment.

However, the report warns that decisions about the future of the JRS that are much more complex than it’s unprecedented, but ultimately relatively straightforward, introduction. Moving too quickly could cause a second surge in unemployment, while moving too slowly would fail to support the recovery.

The mass unemployment risk of moving too quickly is particularly high as the sectors of the economy that hired new workers during the last crisis – hospitality and retail, which accounted for one in five job entries in 2010 and 2011 – are among the hardest-hit this time around.

In order to reassure firms and workers fearful of a premature withdrawal of support, the report says the Government should announce that the scheme will exist in its current form for workers already furloughed until early August, and in some form for all firms until at least the end of September.

The JRS can also help to support the reopening of the economy, says the report, by allowing ‘partial furloughing’ from June onwards. This would enable employees to return to work for some hours, while still receiving 80 per cent of their wages for the hours that they remained furloughed.

Partial furloughing will also offer immediate support to workers in the three-in-ten active firms that have reduced staff hours, and support the return of economic activity. The increased risk of fraud should be countered by significant fines, and the naming and shaming of firms that abuse the system.

Rather than cutting the 80 per cent of previous wages that furloughed workers receive, the Foundation says the priority should be to increase the incentive for firms to reopen by phasing in employer contributions towards the cost of furloughing. Once the easing of the lockdown is well established, firms should be required to cover at least 10 per cent of furloughed workers’ wages.

But while the phasing out of the JRS for most of the economy could begin as soon as August, some parts of the economy face a much longer road back towards more normal operations. With up to 1.7 million hospitality workers estimated to be at risk of redundancy if the JRS is wound up prematurely, the scheme should offer some level of support to these hardest hit sectors until the end of this year.

The Foundation estimates the cost of phasing out the JRS along the lines it proposes would cost around £16 billion from July onwards, taking the total cost of the scheme to around £48 billion.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The Job Retention Scheme has been an essential lifeline for millions of families and hundreds of thousands of firms. However, the Chancellor now faces decisions about the future of the scheme that are much more complex than it’s unprecedented, but ultimately relatively straightforward, introduction.

“The Government should reject calls to swiftly end the Job Retention Scheme. Moving too quickly could spark a huge second surge in job losses at a time when unemployment already looks set to be at the highest level for a quarter of a century.

“The scheme cannot last forever however. It should be phased out gradually, with a longer timeframe for the hardest-hit sectors.

“The Chancellor should also use the scheme to support the recovery by asking employers to contribute towards the wage costs of furloughs and allowing ‘partial furloughing’, with workers returning to work for some of the week, even if not all.

“The retention scheme could end up costing almost £50 billion. That’s a huge sum – but money well spent given the huge threat posed to our health, economy and living standards by this pandemic.

“This policy has made a huge difference in this crisis. It now needs careful and gradual change to ensure the benefits it has provided are secured rather than squandered.”