How can labour market policy help to get people back into the right jobs?

As the economy restarts after the coronavirus crisis, workers that became unemployed eventually find new jobs. But initially these are often not the ‘right’ jobs – they are not good matches between employees’ skills and employers’ needs. What can policy do to improve workforce reallocation?

The Covid-19 crisis has led to a lot of people losing their jobs. Getting people back not just into work, but into the right jobs will be a long process. Policies that have helped firms to keep workers employed during the crisis, and provided income to those who were made unemployed, have been crucial. It is important that they continue to support workers to get back into jobs that are a good match for their skills.

What has happened to jobs during the crisis?

In normal times, a fair amount of workers move between jobs. In a typical month, around 100,000-150,000 people move between unemployment and work and between work and unemployment. About 400,000-450,000 people move directly from one job to another.

Figure 1: UK claimant count (thousands)

Graph showing that the claimant count increased significantly in April 2020

Source: Office for National Statistics
Notes: The claimant count combines claimants of the Jobseeker’s Allowance (JSA) and Universal Credit (UC) who fall into the UC ‘searching for work’ conditionality. Not all of the increase in the claimant count is caused by an increase in unemployment.

In April 2020, the number of workers moving from work to unemployment was five to eight times larger, according to estimates based on counts of benefits claimants (Office for National Statistics, 2020b). At the same time, hiring of new workers effectively stopped, according to data on job vacancies, except in a few specific occupations such as Health and Social Care (Costa Dias et al, 2020b).

Figure 2: Change in vacancy postings, 2019-2020 (%)

Graph showing that vacancies dropped for all positions except some in health and social care

Source: Department for Work and Pensions’ Find a Job web site, and Costa Dias et al (2020b).

Employers are expecting large changes in their workforces over the next year or so, including more reallocation of workers between jobs than is normal (Barrero et al, 2020). It is anybody’s guess how persistent these shifts will be in the number and kind of workers that firms want to hire. But it is safe to say that, at least in the short to medium run, the crisis is leading to large and unusual reallocation of workers between jobs.

Why does it matter what jobs people get?

All recessions cause some degree of workforce reallocation. Job losses spike at the start of every recession. As the recession ends, those workers that lost their jobs eventually find new jobs, but initially these are often not the ‘right’ jobs.

What do we mean by the ‘right’ job? Economists talk about something called matching capital. This is the value that is created by a worker and a firm being well suited to each other, such that the worker is more productive in that job than other similar workers would be. This could be because the worker and firm are just intrinsically suited, and it took a while for them to find each other (job search and matching), or because they invested in developing a relationship that increases the effectiveness of that worker in that job.

Recessions can cause the destruction of some of this matching capital, derived from the quality of the match between the employee’s skill set and the employer’s skill requirements, which takes years of costly search and selection to get right. When workers find new jobs, these might not initially be the ‘right’ jobs in that they might be lower quality than those they held before the recession. The workers finds themselves having to climb back up the ‘job ladder’, which can be a very slow process.

We can see that process at work when in the wake of a recession, we see a relatively high number of job-to-job transitions, as workers search for the right jobs, while productivity and wages tend to remain low. These slow-moving labour reallocation dynamics are a major factor in the persistence of large labour market shocks (Moscarini and Postel-Vinay 2016, 2019; see also Patterson et al, 2016, for an application of a different approach to the UK).

The current crisis is special in the way that it will affect the labour market in at least two ways. First, it is larger than previous recession. Second, because it has been caused by the spread of a contagious virus, it highlights the relevance of job and worker characteristics – such as ease of working from home, proximity of workers to each other in the workplace, and Covid-19-specific vulnerability of individual workers. These were not characteristics that workers, firms or policy-makers have previously been concerned about.

What sorts of policies will help to get people back into the right jobs?

There are three broad types of policy tools that direct workforce reallocation – the benefits system, furlough subsidies and wage subsidies – and they need to work along new dimensions of worker and job characteristics, such as age or the amenability to home working. Policy needs to aim to achieve two things:

Where there is a lot of matching capital – that is, where the match between an individual worker and individual firm is important and will be costly to replicate – then it is important that this match is maintained where they have been made temporarily unprofitable but are likely to recover their full value quickly after the crisis.
They should facilitate workers moving to new jobs where they are needed, by helping those whose jobs have become durably unproductive to find alternative, high-value employment.

These considerations are separate from concerns we might have about correcting for, or at least not worsening, inequalities brought about by the crisis (see Joyce and Xu, 2020; Adams-Prassl et al, 2020; Gardiner and Slaughter, 2020; Overman 2020).

The policies recently put in place by the UK government – most notably the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS) – are clearly aimed at preserving matching capital. At this stage, the effectiveness of those policies is impossible to evaluate with any kind of rigour or precision: we lack the data and a clear view of the sources of variation that would allow us to identify their impact.

Related question: How does the government's furlough scheme work?

But it is very likely that the policies have helped to avert an unemployment tsunami and damaging destruction of matching capital while allowing workers to stay at home and stop the spread of the virus. While obviously not a rigorous comparison, it is worth observing that the United States, where the initial policy response was mostly based on blanket cash transfers and unemployment benefit increases, has seen a staggering 38 million new jobless claims since the beginning of the crisis, an order of magnitude more (as a percentage of each country’s workforce) than the corresponding UK estimate.

While the CJRS is likely to have been effective, there are ways that it could be improved. For example, it should be clearer about removing exclusivity clauses preventing some furloughed workers from taking up stopgap jobs in sectors where demand is high (Costa Dias et al, 2020a). It should allow for short-time work (it will do so from August, under conditions that are not entirely clear yet (see Adam, 2020b; Giupponi and Landais, 2020). Crucially, the CJRS will have to evolve from its current form and eventually be withdrawn (Adam, 2020a) discusses the main challenges associated with this).

One concern is that policies that have been effective at keeping matching capital, such as CJRS/SEISS, might hamper the reallocation of displaced or unproductive workers to high-value job matches. It is a delicate balancing act to balanced these two objectives against each other.

Do we know the ‘right’ job when we see it?

For policy to be effective, it would be useful to be able to identify what are ‘high-value job matches’. Labour economists usually measure the value of a job match using the wage, measures of stability of the match, or the fit between the worker’s skill set and the tasks typically performed on the job. But the crisis has made additional job and worker attributes, to which economists and policy-makers have not traditionally paid much attention, highly relevant.

On the job side, researchers have been very active in the past few weeks constructing occupation-level measures of amenability to home working (Dingel and Neiman, 2020; Mongey et al, 2020), proximity to others in the workplace (Mongey et al, 2020; ONS 2020a; Koren and Peto, 2020), or exposure to disease (ONS 2020a).

On the worker side, the list of potentially relevant characteristics includes cohabiting status, childcare responsibilities (at least while schools remain closed) and the need to use public transport to commute to work. One worker characteristic that seems especially relevant is age (as argued in Fujita et al, 2020), Covid-19 health risk, matching capital and worker reallocation all have distinct (albeit different) age profiles: younger workers are both much more mobile in the labour market and also much safer health-wise than older workers – and as such should be the main fuel for employment reallocation.

Having said that, younger workers are also the ones most at risk of becoming unemployed and suffering from the well-documented ‘scarring’ effects of losing one’s job, especially in a recession (Schmieder et al, 2019). This means that a policy that aims to facilitate labour market reallocation cannot be dissociated from policies supporting the unemployed. While the CJRS currently covers 80% of the income of furloughed workers, those who have been laid off have suffered much worse income losses. One possibility would to increase job search assistance measures (Rosholm, 2014; Belot et al, 2019).

Real-time data on job postings suggests that the very modest recovery in labour demand we are now seeing is not uniform across the job characteristics listed above, with, for example, a stronger demand for occupations involving close physical proximity and that are difficult to perform remotely (Costa Dias et al, 2020).

Whether the mix of new job vacancies is the best for society as a whole is doubtful. Individual workers and employers are unlikely to gauge correctly the full cost to society of high exposure to the disease in the workplace (for example, in terms of an increased burden on the healthcare system). Nor indeed will they gauge the full benefits to society associated with innovation in technologies favouring remote work (for example, derived from the fact that others may subsequently build on those innovations to innovate further). Government intervention is therefore likely to be justified.

What research is underway?

Three broad sets of policies can help to shift workers from unemployment and into work or between jobs: furlough subsidies to tide over normally viable job matches during temporary lockdowns, subsidies to wages or hiring costs in socially desirable activities, and benefits or job search assistance for the unemployed.

Implementing these policies will be very difficult. They have to factor in many variables simultaneously, with little data to inform policy design. As any subsidy scheme, they are fraught with issues of potential fraud and incentives to ‘game’ the system. (Those issues have so far, and probably rightly, been considered second-order, but they are more than likely to gain importance as the economy recovers.) Mistakes will inevitably be made. But research on how best to guide policy towards the labour market in the aftermath of the crisis is underway.

An emerging body of research combining models of labour reallocation with SIR-type epidemiological models of disease transmission (Kaplan et al, 2020, Garibaldi and Moen, 2020) is worth following closely.

Where can I find out more?

Extending the Coronavirus Job Retention Scheme: trade-offs and balancing acts: Stuart Adam of the Institute for Fiscal Studies (IFS) discusses the challenges associated with the future evolutions and eventual withdrawal of the CJRS.

Extending the Coronavirus Job Retention Scheme to short-time workers: Stuart Adam of the IFS considers the implications of extending the CJRS to returning short-time workers, and how it might work.

The challenges for labour market policy during the Covid-19 pandemic: Monica Costa Dias, Robert Joyce, Fabien Postel-Vinay and Xiaowei Xu of the Institute for Fiscal Studies discuss the priorities of the early labour market policy response to the Covid-19 crisis.

Job vacancies during the Covid-19 pandemic: Monica Costa Dias, Agnes Norris Keiller, Fabien Postel-Vinay and Xiaowei Xu of the Institute for Fiscal Studies present virtually real-time information from a daily census of all job adverts posted on Find a Job, a recruitment website maintained by the Department for Work and Pensions.

The labour market policy response to Covid-19 must leverage the power of age: Shigeru Fujita, Giuseppe Moscarini and Fabien Postel-Vinay propose a policy framework to resolve the trade-off between protecting valuable match-specific capital and restoring the desired pace of healthy reallocation.

The effects of the coronavirus crisis on workers: flash findings from the Resolution Foundation’s coronavirus survey: Laura Gardiner and Hannah Slaughter of the Resolution Foundation present evidence on the unequal impact of the Covid-19 crisis on different categories of workers, using data from a new ‘Coronavirus Survey’ run by the Resolution Foundation.

Building effective short-time work schemes for the Covid-19 crisis: Giulia Giupponi and Camille Landais explain how short-time work, a subsidy for temporary reductions in the number of hours worked in firms affected by temporary shocks, can have large positive effects on employment and be more effective than unemployment insurance or universal transfers.

Which occupations have the highest potential exposure to the coronavirus (Covid-19)? Office for National Statistics presents an estimate of exposure to generic disease, and physical proximity to others, for occupations in the UK.

How the UK government should respond to the unequal local economic impacts of Covid-19: Henry Overman of the Centre for Economic Performance at LSE asks how the impact of Covid-19 will differ across local economies in the UK, and proposes policies targeting support to the worst affected areas.