September’s rise in the unemployment rate from 4.5% in August to 4.8% suggests that the previous scaling back of the furlough scheme took its toll. And the unemployment rate may yet climb to about 9% next year, unless a vaccine dramatically improves the economic outlook over the next 12 months.
Previous unwinding of furlough scheme hurts employment and worse to come
- September’s rise in the unemployment rate from 4.5% in August to 4.8% suggests that the previous scaling back of the furlough scheme took its toll. And the unemployment rate may yet climb to about 9% next year, unless a vaccine dramatically improves the economic outlook over the next 12 months.
- In response to the government asking firms to shoulder a greater burden of the cost of their furloughed employees by paying 10% of their wages, firms reduced their staffing levels at a sharp pace in September. The 164,000 decline in LFS employment in the three months to September was bigger than expected (consensus -148,000, CE -145,000). This pushed up the level of unemployment from 1.52m to 1.62m and the unemployment rate up from 4.5% to 4.8%. The 136,000 drop in employment of 18-24 year olds and the 66,000 rise for 65+ year olds provides more evidence of how the crisis has hit the youngest hardest.
- What’s more, the weekly LFS data showed that the unemployment rate rose to 5.1% in the last week of September. Redundancies rose by 181,000 q/q in September to reach a record high. And the HMRC PAYE employment data showed that employment fell by a further 33,200 in October compared to September, leaving the cumulative fall in employment on that measure at 808,000 since January. (See Chart 1.)
- Admittedly, it wasn’t all bad news. The 29,800 fall in the claimant count in October pushed the claimant count rate down from 7.4% in September to 7.3%. (See Table 1.) And the rise in the 3myy rate of average earnings growth from +0.1% in August to +1.3% in September (consensus +1.0%, CE +1.4%) reflects those workers who exited the furlough scheme and kept their jobs going from receiving 80% of their salaries on the furlough to 100%. What’s more, the extension of the furlough scheme until the end of March will support employment during the current COVID-19 lockdown. We estimate that the total number of jobs furloughed could rise from about 2 million in October to about 5 million in November.
- But the furlough scheme will probably only delay the inevitable job losses. Unless a vaccine significantly improves the outlook for activity, we think that employment will fall by a total 6.0%, or 2 million, and the unemployment rate will rise from 4.8% in September to a peak of 9% next year.
Chart 1: Employment (Millions)
Sources: Refinitiv, Capital Economics
Table 1: Labour Market
Source: Refinitiv. 1 3m/3m. 2 m/m
Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, firstname.lastname@example.org