Will the UK’s Coronavirus Job Retention Scheme be a success? | The Daily Star
12:00 AM, March 29, 2020 / LAST MODIFIED: 01:51 AM, March 29, 2020

Will the UK’s Coronavirus Job Retention Scheme be a success?

These are extraordinary times and the UK government has announced an extraordinary set of economic policies in response to them. Perhaps the most radical among these is the Coronavirus Job Retention Scheme, a promise to pay employees 80 percent of their wages up to 2,500 pounds per month, provided that employers furlough these workers, rather than making them unemployed. The implementation of this type of policy in an economic crisis represents nothing less than a long overdue revolution in the UK's handling of adverse macroeconomic shocks and contrasts sharply with the policies adopted by the country in the wake of the 2008 financial crisis.

In the aftermath of the financial crisis, successive UK governments embarked on a ruthless and sustained attack on the welfare state in a now infamous programme of austerity. The so-called economic justification for this programme was rooted in a false equivalence between households and the macroeconomy. According to this flawed logic, because a household in financial distress is obliged to reduce its expenditure, so too should an economy. But unlike a household, in an economy each participant's expenditure is another's income. Thus, when a government embarks on a programme of austerity during a crisis, it reduces incomes and output even further in a vicious cycle that multiplies the negative effects of the initial economic shock.

In contrast to what many professional economists regard as misguided policy choices post-2008, the current offer of wage support will almost surely mitigate the negative economic effects of the Covid-19 pandemic on households that would otherwise have suffered from unemployment. In other words, wage support is appropriately targeted as it will benefit the very households which would have been forced to cut their expenditure levels and so would have contributed to a vicious macroeconomic cycle of low expenditure begetting lower income, and so on. If the experience of 2008—when businesses which received cash injections tended to hoard them rather than spend them—are anything to go by, policies that put money in the pockets of vulnerable workers are more likely to mitigate economic disruption than if equivalent funds were disbursed to businesses.

Supporting expenditure levels during the crisis itself, however, is only one of the beneficial effects of a wage support policy in a time of crisis. Another is that it may help to keep a severe, but short-term economic disruption (in this case the COVID-19 pandemic, which most experts expect to last a matter of months) from turning into a more prolonged recession with persistent and high levels of unemployment (that may drag down living standards for years to come). This property of the current UK policy is down to the proviso that to be eligible for the payment workers must be furloughed, but not dismissed.

To understand the full implications of this stipulation, we must be clear on how economics conceptualises jobs. Each job is a match between an employer and a worker. A good match allows a worker to perform at a level that is close to her or his productive potential. Under normal economic conditions, over time workers leave (or are obliged to leave) bad matches to form better ones, improving overall productivity and aggregate output. Productivity may also improve in matches that are stable over time as workers adapt to the culture of an institution and acquire job-specific skills through learning by doing. A major danger from the economic contraction necessitated by policies to contain the current pandemic is that these temporary measures may induce long lasting damage to productivity by breaking otherwise stable and productive pairings between employers and employees.

If these pairings were broken because workers had been laid off, then even after the acute threat of the virus had passed, workers would have had to spend time and effort searching for jobs to which they are appropriately matched. During this time, unemployed workers would have no income (except benefits payments) and would therefore have less purchasing power than they did before the pandemic. In turn, relatively depressed demand would make jobs scarcer and thus more difficult to find. Over time, unemployed workers may become deskilled or discouraged from job search so that some do not return to productive employment, even in the longer term. Thus, a temporary economic downturn can have a sustained effect on the unemployment level.

If, on the other hand, workers are furloughed during the months in which business is restricted, the job retention grants enable them to sustain their expenditure levels. Then after restrictions are eased, they will be able to return to their jobs relatively quickly. They will again demand goods and services to much the same extent as they did prior to the pandemic and the persistent effects of the pandemic on unemployment would be smaller than they would otherwise have been.

Of course, policies such as this are expensive in the short term and taxpayers have a right to ask if the expense is worth the benefit. The Financial Times estimates that over the three-month duration of the current policy, it will cost 3.5 billion pounds if 1 million workers avail it, while the well-respected Institute for Fiscal Studies estimates that it will cost 10 billion pounds if 10 percent of workers in the UK economy are affected. However, if the policy is successful in shortening the economic downturn resulting from the pandemic by preserving jobs and purchasing power, the UK government is likely to recoup a substantial part of the current expense in the form of tax revenue that it would otherwise have lost due to the fall in incomes that would accompany a prolonged downturn. But perhaps even more importantly, in a time of crisis, it is the job of governments to ease the hardship inflicted on vulnerable workers. It just so happens that in this case it is also the economically prudent thing to do.


C Rashaad Shabab is a senior member of faculty in the Economics department at the University of Sussex Business School.

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