By July, we think that around 4 million people had already left the government’s job furlough scheme and 5 million remained on the scheme. That fall is faster than we had expected but does not change our forecast that the ILO unemployment rate will reach a peak of around 7% by mid-2021.
- By July, we think that around 4 million people had already left the government’s job furlough scheme and 5 million remained on the scheme. That fall is faster than we had expected but does not change our forecast that the ILO unemployment rate will reach a peak of around 7% by mid-2021.
- Official figures suggest that by 2nd August, 9.6 million employees (or 29% of the workforce) were on the furlough scheme. (See Chart 1.) But this is potentially misleading in two ways. First, the data refer to the number of furloughed jobs, not the number of furloughed workers. If the share of those on the scheme that have two jobs is the same as usual (about 3.5%), then the number of people on the scheme may be lower, at 9.3 million. Second, the data show cumulative, not current, take-up. So the government figures do not tell us how many people are on the scheme right now. This is crucial as how fast workers leave the scheme and end up back at work or unemployed will go a long way to determining the speed of the recovery.
- The government may provide this information at some point. The next opportunity is the release scheduled for 21st August. Until then, the ONS Business Impact of Coronavirus Survey and the BoE Decision Maker Panel provide the best guide. These surveys are not perfect (it is not always the same businesses responding each time), but they are better than nothing. Both suggest that take-up of the scheme peaked in late April, between 8.3 million and 9.6 million (25% and 29% of the workforce), and that between April and July the number of people furloughed fell by 40-50%, to about 5 million. (See Chart 2.)
- This decline is faster than we had anticipated as we had assumed that the number of people on the scheme would still have been over 9 million at the start of August and it would fall by 2.3 million each month to zero by November. But there may have been 4 million fewer people on the scheme by the start of August.
- However, there are two reasons why this does not significantly change our labour market forecasts. First, in the statistics those on the furlough scheme are classified as employed, even if they are not actually working. So if the bulk of the 4 million or so people leaving the scheme between April and July returned to work – as seems likely given it doesn’t make sense to let go employees that weren’t costing anything – then employment won’t change much. Instead, this will raise total hours worked.
- Second, the share of furloughed workers that lose their jobs is anchored by our GDP forecasts, which haven’t changed. We think that 1.5 million jobs will be lost in total, meaning that the 1% fall in employment already seen will develop into a 5% fall by November. That fall is the main driver of our 6% estimated decline in real household disposable incomes, which is what really matters as it determines the ability of households to spend.
- As for our unemployment forecasts, we have assumed that about half of those who lose their jobs from August become unemployed and about half become inactive. We have also assumed that 75% of those classed as inactive come back into the workforce at a later date. (See here.) We will update these assumptions as the furlough scheme continues to unwind and more information is available.
- Overall, we still expect the unemployment rate to rise from 3.9% to a peak of 7.0% in mid-2021. That is lower and later than assumed by the OBR, largely because the OBR counts those who are inactive as unemployed. But the bigger point is that sharply falling incomes will constrain GDP for some time yet.
Chart 1: Cumulative Claims to Furlough Scheme (Mill)
Chart 2: No. of Employees Currently Furloughed (Mill)
Sources: BoE, ONS, Capital Economics
Ruth Gregory, Senior UK Economist, +44 7747 466 451, email@example.com