Economics

Countering the threat of mass unemployment

Rishi Sunak’s plan for jobs will help but may yet prove inadequate

July 08, 2020
Photo: WIktor Szymanowicz/NurPhoto/PA Images
Photo: WIktor Szymanowicz/NurPhoto/PA Images

One generally bright spot in an otherwise poorly performing economy over the past decade has been the labour market. Jobs became plentiful and the unemployment rate sank last year below 4 per cent of the labour force, its lowest since 1974. That achievement is now in peril. A breaking wave of job losses resulting from the coronavirus crisis threatens mass unemployment on a scale not experienced since the 1980s, when the jobless rate peaked at almost 12 per cent.

That wave would already have crashed down but for the unprecedented interventions already made by Rishi Sunak, the Chancellor of the Exchequer, to protect employment. The government’s furlough scheme, through which the Treasury picks up 80 per cent of the cost of wages (up to a monthly cap of £2,500), is covering 9m employees. Through a separate scheme, 2.7m self-employed workers have been able to get income support.

Those measures were designed to help people keep their jobs at the height of the emergency. Today the chancellor announced an ambitious set of new measures to support the labour market now that the worst is over. Sunak stuck to his plan to phase out the furlough scheme in the autumn. But he announced that employers who do bring back their staff and continue to employ them through to January (paying at least £520 on average a month from November) will get a £1,000 bonus for each person. Since 9m people have been furloughed this could cost up to £9bn.

Mindful of the enduring harm to young people unable to get into work when the economy is depressed, the chancellor also announced a “kick-start” scheme starting this autumn that will target 16-24 year-olds who are at risk of long-term unemployment. Provided that employers taking them on demonstrate that these are additional jobs, the government will pay their wages for six months at an initial cost of £2bn. There will also be more support for apprenticeships and to assist jobseekers.

In addition to these specific steps to bolster jobs, the government announced new temporary measures to boost the recovery that is already under way. Sunak aims to ginger up the housing market through a reduction in stamp duty on residential purchases in England and Northern Ireland until the end of March 2021. The hospitality and tourism industry will benefit from a six-month cut in VAT on food, accommodation and attractions such as theme parks, from 20 per cent to 5 per cent. Sunak confirmed that £2bn would be made available to help make homes more energy-efficient while £1bn would be similarly used for public buildings. In a gimmicky gesture the Treasury will even pay for a discount on meals eaten out during August.

The package, which the chancellor said could cost up to £30bn, was considerably more ambitious than expected. It could do the trick in containing a surge in unemployment if the effects of the epidemic were essentially temporary. Employers usually have sound commercial reasons to keep staff rather than firing them and then having to find replacements. Hiring is expensive, and the new recruits then have to learn the company’s specific working practices.

Unfortunately, the economic impact of the epidemic looks increasingly likely to be permanent, blighting sectors that involve a lot of social contact, ranging from air travel to gyms. The government may have allowed the hospitality sector to reopen on 4th July but it is subject to restrictions that raise costs, such as increasing the distance between tables in restaurants. A discount on meals out in August may not attract those who remain cautious about venturing out for fear of being infected with the virus, which is still at large.

The Covid crisis has also accentuated existing business weaknesses. The high street has been suffering for some time as shoppers buy ever more online. That share of retail spending has now risen from a fifth in January to a third in May, increasing the misery of traditional shopping outlets.

Economic forecasters expect the jobless rate to surge. For example, even assuming there isn’t a second wave of the epidemic, the OECD, a club of mainly rich economies, is forecasting for Britain an unemployment rate of 9.7 per cent in the final quarter of 2020, up from 3.8 per cent at the end of last year. That jump of 5.9 percentage points is one of the biggest increases of its 37 members, exceeded among European countries only by Spain.

Any such forecasts are fallible. Already for example the recovery in Britain’s economy from the low point in April has been swifter and sooner than expected, according to Andrew Haldane, Chief Economist of the Bank of England, in a speech at the end of June. Using a variety of “fast indicators” such as payments data, he reckoned that GDP had fallen by around 20 per cent between the final quarter of 2019 and the second quarter of 2020, whereas the Bank had estimated a decline of 27 per cent in May.

More important still, globally, there remains massive uncertainty about the pandemic itself. On the one hand, it continues to spread around the world at baleful speed. On the other hand, an immense effort is under way to develop an effective vaccine, which could in time turn the tables.

Given these uncertainties, much of what Sunak announced today made sense. The weakness in his package is that it is essentially a new set of temporary measures. If, as seems likely, many jobs will no longer make commercial sense not just in the months ahead but for years to come, the priority should be to help workers shift into sectors that are economically viable, supporting that process through training.

One government after another has neglected vocational education or messed about with it. Now more than ever, a sustained effort is needed to assist workers of all ages who are displaced from their jobs to improve their basic skills and acquire new vocational expertise. That is vital if Britain is to avoid repeating the unemployment trauma of the 1980s.