The smaller-than-expected fall in employment in May and evidence that the first wave of joblessness in the coronavirus crisis ended in June shows that the furlough scheme has been effective in preventing a big rise in unemployment. The big question is how large the second wave of unemployment will be when the scheme is furlough scheme is wound down.
Reassuring despite largest fall in employment since 2011
- The smaller-than-expected fall in employment in May and evidence that the first wave of joblessness in the coronavirus crisis ended in June shows that the furlough scheme has been effective in preventing a big rise in unemployment. The big question is how large the second wave of unemployment will be when the furlough scheme is wound down.
- While the 126,000 fall in headline employment from December-February to March-May was the largest since September 2011, it was below the consensus forecast of 234,000. And the ILO unemployment rate was unchanged at 3.9% as 92,000 people left the workforce. This “discouraged worker effect” is not surprising given the slim chance of getting a new job – vacancies were down by 60% in June compared to pre-virus levels.
- That said, as the headline figures are a three-month average, they don’t fully capture the drop in employment. Weekly data show that employment fell by 360,000 (1.1%) between February and the end of May. (See Chart 1.) If there had not been a discouraged worker effect, the unemployment rate would have hit 5% by the end of May. And the PAYE data from HMRC point to a larger 650,000 drop in employment between March and June.
- Nonetheless, in the face of the sharpest downturn in activity in recorded history, the damage to the labour market is remarkably limited. What’s more, timelier data show that the first wave of job losses ended in June. After falling by 124,000 m/m in May the fall in the number of employees paid through Pay As You Earn (PAYE) slowed to 74,000 m/m in June. And following a 1.4 million surge in the claimant count measure of unemployment from 1.2 million in March to 2.7 million in April, it edged down by 28,000 in June. The claimant count unemployment rate fell from 7.4% to 7.3% as a result.
- That reflects the success of the government’s furlough and self-employed income support schemes which continue to support over 12 million workers (35% of the workforce). With these workers employed but away from work, total hours worked fell by 17% in the three months to May. And total pay growth fell to minus 1.2% y/y in May dragging the three-month average headline rate down to -0.3% reflecting the 20% pay cut that many furloughed workers have taken.
- Of course, there will be another wave of layoffs when the furlough scheme is wound down from August. We think that will cause the 1% fall in employment so far will grow to 5% and that the unemployment rate to rise to 7% in mid-2021. But that would be a good result given the sheer size of the downturn in activity and mean that the huge government response has successfully averted fears of mass unemployment.
Chart 1: Employment (000s)
Sources: Refinitiv, ONS
Andrew Wishart, UK Economist, +44 7427 682 411, email@example.com