How does the government’s furlough scheme work?

The Coronavirus Job Retention Scheme was set up to encourage employers to keep their staff on during lockdown and make it easier for everyone to return to work when restrictions lift. How does the furlough scheme work and what will happen to jobs as it’s wound down?

The Coronavirus Job Retention Scheme (CJRS) was introduced by the UK government at the end of March 2020. Under CJRS, the government pays most of the salaries of workers who are furloughed (remaining employed by firms, but not actually working). CJRS is an expensive policy: the Office of Budget Responsibility estimates gross costs of £63 billion until July 2020 and net costs of £50 billion. A large number of organisations have used the scheme (see Figure 1).

Figure 1: 91% of businesses who had paused trading applied for the Coronavirus Job Retention Scheme, compared with 72% of businesses who were still trading

Graph showing the percentage of all government schemes applied for

Source: Office for National Statistics

Why was the Coronavirus Job Retention Scheme introduced?

The scheme was introduced because of the large and very rapid impact of the crisis on the world economy. The government wanted to provide incentives for employers to keep hold of their employees in the months immediately after lockdown, and to boost the incomes of the lowest paid workers. The idea was that by protecting jobs it would make it easier for people to get back to work when restrictions were eased.

How does the Coronavirus Job Retention Scheme work?

Employers who are registered for PAYE and who stand down (‘furlough’) their workers as a result of the Covid-19 virus can claim a cash grant of 80% of their employees’ wages, up to £2,500 per month. The grant also covers their National Insurance and pension contributions. The employer can choose whether or not to top-up the remaining 20% of pay.

The scheme was originally introduced for three months, extended for one month, and then extended for a further three months until the end of October 2020. The arrangements under the revised version differ in that employees could work part-time with an appropriate reduction in the amount of government support to the employer. There is no guarantee that the worker will be retained after the scheme ends; current estimates are that more than a quarter of workers on the scheme will not be retained.

By international standards, the scheme is generous in terms of earnings replacement and in not requiring any conditionality – that is, the employer does not have to demonstrate a reduction in revenue to apply for the scheme. But most OECD countries are operating similar schemes; a notable exception is the United States, which is largely using the existing unemployment insurance system covering permanent and temporary lay-offs. Table 1 summarises the schemes in several different countries.

Table 1: How does the UK’s system compare with other countries in terms of generosity?

Table showing international comparisons for the furlough scheme

Who is most affected by the Coronavirus Job Retention Scheme?

The scheme is supporting a large part of the UK workforce – around 7.5 million employees in mid-May 2020, or around one quarter of the UK workforce.

The cumulative total cost of the scheme by July 2020 is expected to be £50 billion; extending the scheme to October with slightly reduced generosity is expected by Paul Johnson (director of the Institute for Fiscal Studies) to raise total costs to around £80 billion.

Total scheme costs plus other subsidies to firms including tax breaks and reimbursement of sick pay costs are expected to total £130 billion. This is roughly the same amount of money as the capital injected into banks during the 2008/09 global financial crisis. But this scheme is potentially a direct injection into consumer spending rather than into the balance sheets of financial institutions.

The hardest-hit sectors of the economy have a preponderance of younger workers, often female and the low paid, with many likely to be on zero hours contracts. It is not certain that all employers will choose to use the scheme, especially where they have workers on such contracts. Claims for Jobseeker’s Allowance and Universal Credit have also risen. But to the extent that employers do use the scheme, the rise in unemployment and expenditure on these benefits will be ameliorated, at least in the short run.

Figure 2: Share of employees in shutdown sectors by age and gender

Graph showing the age and gender distribution of workers in shut-down sectors

Source: Joyce and Xu, 2020, based on the Quarterly Labour Force Survey Q1-Q4 2019, Waves 1 and 5 only.
Note: Employees only. Excludes workers in full-time education.

What will happen to jobs as the scheme is wound down?

There is no requirement that employers will retain their furloughed workers after the scheme has ended, currently projected to be at the end of October 2020. But the change in the arrangements announced in May, by which employers can continue to receive some support when workers return to part-time work can be seen as an attempt to integrate the furloughed workforce gradually back into employment. It also brings the UK’s scheme into line with the comparable schemes operating elsewhere in OECD countries (see Table 1).

Work by OECD authors and others (Hijzen and Venn, 2011; Boeri and Bruecker, 2011) suggests that after recent short-time working schemes were introduced during the 2008/09 recession, employment among contracted permanent workers tended to return to pre-crisis levels, but temporary and zero hours contract workers were typically not retained.

But the current crisis has had a very different impact on the workforce than the banking crisis in the late 2000s, and the number of ‘marginal’ workers affected is likely to be higher than in that era, when employees in the financial sector were disproportionately affected. There are likely to be much bigger long-term changes in industrial structure as a result of the current crisis.

Evidence from an earlier short-time working scheme

Although the disruption to employment was not on a similar scale, perhaps the most recent episode to have had a comparable impact to the Covid-19 pandemic was the 1974-77 oil price shock. The fourfold increase in oil prices, coupled with industrial unrest, led to severe supply disruptions in the UK and elsewhere, exacerbated in the UK by a legacy of industrial unrest and the three-day week. As unemployment rose, successive UK governments resorted to temporary schemes to subsidise short-term working.

The most extensive of these schemes was the Temporary Short-time Working Compensation Scheme (TSTWCS), which was in place from 1979 to 1984. Evidence suggests that the TSTWCS did indeed protect jobs in the short run but, in subsequent years, the industries that had disproportionately benefited from this protection saw major falls in employment and their replacement by other sectors of the economy (Metcalf, 1986). The dislocation of this change in industrial structure, exacerbated by macroeconomic policies in the 1980-83 period, meant that it took several years to return unemployment to its pre-crisis levels.

Under the TSTWCS, employees on short-time working (which could be rotated through an employer’s workforce) would be paid 75% of normal pay for each day without work provided they carried out a normal day’s work after seven consecutive days without work for up to a year. The scheme was financed by central government.

At its peak, the scheme covered one million jobs. But the incidence of TSTWCS jobs was very different from the current scheme. It was almost wholly concentrated in manufacturing, and especially in the sectors of textiles, clothing and footwear where there was almost 100% coverage at the peak of the scheme. An important difference from the coronavirus scheme was that it excluded firms employing fewer than 10 people.

The short-run impact of the scheme was considerable; the long-run impact less so. Throughout the 1980s and 1990s, employment in manufacturing in the UK declined, especially in these sectors. By the time something close to ‘full employment’ was restored in the late 1980s, the structure of employment was very different in the UK economy – a trend that continued over the next decades.

Figure 3: Broad sectoral shares of UK employment over six decades (%)

Figure showing how employment in the UK has shifted from manufacturing to professional, scientific, and services

Source: Office for National Statistics

Where can I find out more?

Coronavirus and the latest indicators for the UK economy and society: 21 May 2020: Latest data from the Office for National Statistics.

Extending the coronavirus job retention scheme: trade-offs and balancing acts: Stuart Adam at the Institute for Fiscal Studies.

The effects of the coronavirus on workers: Flash findings from the Resolution Foundation’s coronavirus survey.

A policy for a rebound economy: Michael Devereux discusses why the furlough scheme should be extended.

‘Employment subsidies and redundancy’ by David Metcalf, in the 1986 volume edited by Richard Blundell and Ian Walker: Unemployment, Search and Labour Supply, Cambridge University Press.