Government support for employment fading - Capital Economics
UK Economics

Government support for employment fading

UK Economics Update
Written by Andrew Wishart
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The government is removing some of its support to employment. The national furlough ends on the 31st October and the new Job Support Scheme is less generous and narrower. As a result, the pace of the fall in employment will soon speed up.

  • The government is removing some of its support to employment. The national furlough ends on the 31st October and the new Job Support Scheme is less generous and narrower. As a result, the pace of the fall in employment will soon speed up.
  • At its peak in May, the national furlough scheme (the Coronavirus Job Retention Scheme) was paying 80% of the wages of 8.9 million people (39% of private sector employees). There were still about 2 million people on it at the start of October. (See Chart 1.) There will be no one on it after it ends on 31st October. The vast majority of those coming off the scheme so far have returned to work, with “only” around 690,000 laid off according to HMRC.
  • The new “Job Support Scheme” (JSS) is much less supportive in two ways. First, whereas the government paid 80% of wages under the furlough scheme, it will pay a maximum of 22% on the JSS. (See Chart 2.) Even in the extension for businesses forced to close by local lockdowns, that only increases to 66%. (See Chart 3.) Second, the use of the JSS will be much less widespread. Only workers doing at least a third of their hours but less than 100% are eligible. And, of course, the extension is limited to those businesses forced to close by law in COVID-19 tier 3 restricted areas.
  • The new scheme is better than nothing. But the bridge the government put under employment will become a lot less solid. We anticipate that GDP will still be 8.5% below its pre-virus level in November. So as wage subsidies taper away, businesses will lay off some of the 2 million workers left on furlough. Under the less generous JSS, we anticipate that the blue line in Chart 4, employment, will fall back towards the black line, GDP, more quickly than it would have done if the furlough scheme had been extended.
  • The headline employment figures (released later than the HMRC data) showed a 482,000 drop in employment from its pre-virus level by August. We expect the total fall in employment to reach 1.5 million by spring 2021. That’s a 4% drop in employment and could be consistent with the unemployment rate rising to just shy of 8% in the second half of next year.

Chart 1: Employees on the Furlough Scheme (Millions)

Chart 2: Contribution to Employees Wages (%)

Sources: HMRC, ONS, Capital Economics

Sources: HM Treasury, Capital Economics

Chart 3: Contribution to Employees Wages (%)

Chart 4: Employment & GDP

Sources: HM Treasury, Capital Economics

Source: Refinitiv, ONS, Capital Economics


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com