Has job furlough reduced UK labour force participation after Covid-19?

Many countries implemented policies to support individuals unable to work due to the lockdowns and other restrictions on economic activity that were implemented during the Covid-19 pandemic.

In the UK, the job furlough scheme – formally known as the Coronavirus Job Retention Scheme – operated from 1 March 2020. It provided grants to employers to retain and continue to pay staff during lockdowns, at up to 80% of their wages.

The scheme was originally intended to end in October 2020 with interim adjustments to allow for partial compensation for part-time work. But it was re-opened in the autumn of 2020 in light of the second wave of Covid-19 infections, with less generous compensation to employers.

The scheme was finally ended in September 2021. Thereafter, displaced workers would have to rely on other means of financial support such as universal credit.

At its peak – from April to June 2020 – the scheme was subsidising over eight million workers. This had reduced to roughly half that number in the second phase in early 2021, before declining to under two million by June 2021.

Across the duration of the scheme, 11.7 million employee jobs were furloughed, at an outlay (gross cost) of £70 billion. Net costs will have been lower as furloughed workers will have continued to pay tax, whether inactive or working part-time.

What was the rationale for the job furlough scheme?

The central question facing economic policy-makers during the pandemic was how to support labour force participants during lockdowns, social distancing measures and the general economic downturn in such a way as to permit a bounce back in economic activity when the pandemic ended.

In common with most other countries, the UK assumed that some form of financial support for displaced workers was essential. Allowing firms to dismiss workers, who would then rely on welfare payments until rehired, was seen by many countries as sub-optimal relative to schemes that emphasised job retention.

Wage subsidies or other forms of direct support to firms were possible alternatives to the furlough scheme. But these options were subject to the criticism that they did not directly tackle the implications of lockdown for economic activity.

On the other hand, critiques of the furlough retention arrangements until recently have been that they may have subsidised jobs that did not survive the pandemic. This is likely to have resulted in costs incurred from an inefficient allocation of resources (what economists call ‘deadweight losses’) and restricted worker mobility. Further, it has been argued that a more selective sectoral approach to subsidies might have retained most of the furloughed jobs but at a lower cost.

What happened to the workforce?

More recently, a new concern about the effects of the furlough scheme has emerged.

Labour force participation in the UK has failed to recover after Covid-19. According to some, this has arisen because of the generosity of the furlough scheme.

Being paid to stay at home during the pandemic has meant that the UK workforce has ‘lost its mojo’, says one commentator. Another states that ‘huge government handouts’ during the pandemic have left workers reluctant to go back to their jobs – they are said to be more ‘work shy’.

The basis for these assertions is a statement attributed to the Bank for International Settlements (BIS). Its quarterly review for December 2023 contains a feature on post-pandemic labour markets, in which the authors suggest that across economies, ‘[labour force] participation has been growing more slowly where pandemic-related fiscal support was larger’.

Their analysis shows a weak negative correlation between the ‘deviation of labour force participation from trend’ since Covid-19 and ‘fiscal support (for Covid as a percentage of GDP’ (see Graph 5 of the report). In other words, where a country spent more on Covid-19-related labour market measures, the recovery of workforce participation has been lower.

Since one dimension of government spending during the pandemic was the job retention schemes, and since the UK had one of the more generous versions, this correlation motivates the commentary discussed above.

In what follows, the issue of the relationship between the furlough scheme and the slow recovery in UK labour force participation is examined in more detail in an international context.

It is worth noting that ‘fiscal support as a percentage of GDP’ covers a number of interventions, of which furlough schemes are only one. Countries that focused on ‘job retention’ schemes rather than, say, generalised welfare payments or business subsidies might be expected to have rather better outcomes in terms of post-Covid-19 labour force attachment.

Further, the cost of schemes depends not just on their generosity (the ‘replacement rate’) but also on their duration. And as ever, correlation does not mean causation. For example, countries that suffered a higher incidence of Covid-19, and especially of ‘Long Covid’, might have had both high expenditure on pandemic-related payments and a slower recovery in labour force participation rates.

What has happened to labour force participation after the pandemic?

Recovery of the labour force participation rate in the UK has been poor. Table 1 describes the change in the rate post-Covid-19 for a number of countries. The UK stands out as having the worst record in recovery of these broadly comparable economies. This slow growth does not appear to relate to the level of the participation rate, since it might be the case that faster growth would arise from a lower base.

It is striking that those countries with the slowest growth of participation were among those hardest hit by the pandemic, in terms of ‘excess deaths’ – which refers to deaths that would not have occurred in the absence of Covid-19 (BIS, 2023 and The Economist).

Indeed, the negative correlation between the change in participation rates and excess deaths is much stronger than that put forward in the BIS report regarding the generosity of economic measures supporting workers during the pandemic.

This could reflect an association of underlying health problems and Long Covid with measured excess deaths and a slower recovery of participation.

Inclusion of other OECD countries (such as in those in Central and Eastern Europe) would weaken this correlation, where faster recovery in participation rates has come from a lower base despite a high incidence of excess deaths.

Nevertheless, underlying health issues and initial participation rates are probably a better ‘explanation’ of post-Covid-19 trends than the generosity of furlough schemes and related measures.

Table 1: Participation rate changes and excess deaths

How generous were furlough schemes?

Another key point in assessing the ‘work shy’ argument is to measure the relative generosity of income support measures across countries.

There are broadly two indicators: first, how long such measures were in operation; and second, the average generosity of payments relative to underlying earnings (the replacement rate).

Table 2 describes the duration of measures taken to support workers, noting the percentage of total employment covered during the peak of the first wave of the pandemic (April-May 2020) and the residual coverage towards the end of the pandemic (November-December 2021).

The United States did not deploy a job retention scheme as such, relying initially on more generous payments to unemployed workers and direct subsidies to firms. A minority of countries offered direct wage subsidies but measures such as job furlough (here labelled ‘short-time working’) were more prevalent.

Table 2: Coverage by job retention measures at Covid-19 peak and end

Source: OECD, March 2022

One striking data point in the BIS report is that Ireland retained a high degree of support to the end of 2021 and yet, from Table 1, exhibited one of the highest post-pandemic growth rates of participation. Belgium, Canada and the Netherlands also exhibit above average rates of growth despite the retention of measures well into 2021.

Job retention measures in the UK, at their peak, did indeed cover a high fraction of the workforce – comparable to the Benelux countries and France. But these had been reduced both in their generosity and coverage long before the end of 2021. In summary, the duration of job retention schemes seems to have little explanatory power when it comes to measuring post-Covid-19 participation trends.

What of the generosity of the schemes as measured by the replacement rates of income support relative to average earnings?

Table 3 identifies country-specific replacement rates differentiated by type of job retention scheme and by date. It also compares these rates with average replacement rates of existing unemployment insurance programmes; the latter demonstrating that most job retention and wage subsidies schemes were considerably more generous than existing unemployment insurance programmes (OECD, 2021).

Table 3: Replacement rates of Covid-19 support measures by scheme type, date and comparable unemployment insurance rates

Table 3 suggests that the generosity and type of job retention schemes vary widely. Although the UK is towards the higher end of replacement rates, it does not stand out as among the highest, although it does have one of the highest discrepancies between the generosity of the furlough scheme and the basic rate of unemployment insurance benefit.

Ireland has a relatively low level of support through wage subsidies although, as suggested earlier, the duration of receipt of payments to employees was longer than in most other countries.

The figure for the United States must be interpreted allowing for the rather different form of support programme implemented there. Among the better performers in terms of growth of participation rates some, such as the Netherlands and Denmark (see Table 1), had relatively high replacement rates; others, such as Belgium and Ireland, did not.

Conclusion

Economic performance in the UK has been relatively weak post-pandemic, reflected in the slow recovery of labour force participation. It was among the more generous countries in terms of the level and coverage of the job furlough scheme. But clear evidence of cross-country correlations between various indicators of the incidence of job retention schemes and post-Covid-19 economic performance are hard to find.

There is tentative evidence that underlying health conditions, which may be reflected in the UK’s above average level of excess deaths from Covid-19, and the well-documented incidence of obesity and other factors influencing work capacity, may play a part in explaining the UK’s performance. But other data are required to analyse this contention in greater detail.

Where can I find out more?

• OECD employment outlook.
• Office for National Statistics for the latest employment and workforce participation numbers.
• House of Commons Library (on the UK’s Covid-19 measures).
• Bank for International Settlements quarterly review.
• The Economist’s computation of ‘excess deaths’.

Who are experts on this question?

• Jonathan Wadsworth
• Richard Disney
• Jonathan Cripps
• Gabriel Ulyssea
• Tom Waters
• Mike Brewer

Author: Richard Disney

Photo by klikk for iStock