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Furlough – Prolonging the Inevitable?

22nd May 2020

It goes without saying that the coronavirus pandemic is having a brutal, frankly harrowing, impact on labour markets across developed markets. Having been close to full employment at the beginning of the year, we are now in the midst of mass unemployment; a phenomenon which will likely have a disproportionate impact on those at the lower end of the income spectrum.

The policies implemented to mange this tsunami of job losses have been vastly different depending on which side of the Atlantic you sit. In the US, policymakers have largely chosen to strengthen the social security safety net; raising unemployment benefits and increasing the number of persons eligible to claim unemployment insurance.

In contrast, European policymakers have largely attempted to keep people in employment where possible, introducing a host of furlough and short-time work schemes to support businesses and preserve jobs to the greatest possible degree.

The immediate impact of the measures has been largely as expected; sky-high unemployment claims in the US (36 million since the pandemic began), and sky-high furlough claims on this side of the pond.

However, as the pandemic continues, and the economic fallout from the virus becomes clearer, questions are beginning to be asked over whether the job retention schemes are merely prolonging the inevitable. Already, the UK’s Coronavirus Job Retention Scheme (CJRS) has seen more than 8 million jobs furloughed, at a cost to the taxpayer of more than £11bln thus far. With the scheme having now been extended until the end of October, it is conceivable for the final cost to run to in excess of £50bln.

While only time will tell whether this is money well spent, it is already clear that some jobs have been lost forever, or at least for a prolonged period of time. The travel and leisure industry, for example, has been decimated by the pandemic. By some estimates, it could take until 2023 for air travel demand to return to pre-virus levels; it is not sustainable for companies not to trim their workforce in such an environment.

As a result, it is likely that the furlough scheme is keeping alive some ‘zombie’ jobs, and merely serving to postpone the inevitable layoffs.

This raises important questions over what comes next, and some clarity on this should come in July the point at which employers will begin to contribute towards the costs of the furlough scheme. It is at this point that employers’ willingness to bring people back onto their books will be put to the test. Should employers not wish to re-hire, the furlough scheme will merely prove to be a very expensive way of delaying unemployment.

However, on a more optimistic note, the furlough scheme – if phased out correctly and if the economy recovers swiftly – may prove to be just the tonic that the labour market requires to get back to a more solid footing.

Only time will tell.

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Simply email to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.

Michael Brown, Senior Market Analyst, Caxton FX