While the success of the UK’s job furlough scheme has prevented the unemployment rate from rising as far as it has in the US, an increase in UK unemployment has been delayed rather than avoided altogether. This is a key reason why we expect an impressive initial rebound in the UK economy to give way to a slower recovery and why we think that the UK recovery will lag behind the recovery in the US.
- While the success of the UK’s job furlough scheme has prevented the unemployment rate from rising as far as it has in the US, an increase in UK unemployment has been delayed rather than avoided altogether. This is a key reason why we expect an impressive initial rebound in the UK economy to give way to a slower recovery and why we think that the UK recovery will lag behind the recovery in the US.
- The impact of the crisis on the labour market has been very different in the UK and euro-zone compared with the US. The unemployment rate in the US shot up from 3.5% in February to a peak of 14.7% in April and given the misclassification of some absent workers as employed, the “true” unemployment rate may have been nearer to 20%. (See here.) In the UK, the unemployment rate stood at 3.9% in June, no higher than in February. In the euro-zone, it only reached 7.8% in June, up from 7.2% in February. (See Chart 1.)
- A key reason for this disparate performance is the effectiveness of the job retention schemes in limiting the rise in unemployment. Over a quarter of the workforce were signed up to the UK and euro-zone wage-subsidy schemes at their peak. (See Table 1.) That meant that they were still officially counted as employed. By contrast, the US’s job retention scheme, the Paycheck Protection Program (PPP), may have kept a far smaller 1.4% of the workforce employed, meaning that temporary layoffs in the US have surged.
- Indeed, of the 23.1 million unemployed in the US at the peak in April, 18.1 million (or 78%) reported they were on “temporary layoff” meaning that they expect to return to work within the next six months. Note that had all of the furloughed workers in the UK been classed as temporarily unemployed, then the UK unemployment rate would have also jumped, to a peak of 27%. (See Chart 2.)
- Even excluding those who have been temporarily laid off, there has been a bigger rise in “permanent” unemployment in the US. The 1ppt rise in the unemployment rate of permanent job losers in the US from 0.8% in February to 1.8% in June is larger than the 0.6ppt rise in the headline unemployment rate in the euro-zone over the same period and compares with no rise at all in the unemployment rate in the UK. (See Chart 1 again.) The higher rate of permanent job losses in the US means that many workers whose old jobs are no longer viable will have already started to look for new jobs. As a result, in the US, the adjustment in the labour market has happened sooner. But in the UK and the euro-zone, a bigger adjustment is yet to come. There will be many workers still on furlough schemes, counted as employed, who do not have jobs to go back to. As these schemes wind down, this will lead to a second wave of unemployment.
- And the less generous scaling up of Universal Credit in the UK means that when the second wave of unemployment occurs in the UK, the damage to household incomes will be more severe. Indeed, the major expansion of unemployment insurance benefit in the US meant that about half of all workers laid-off had higher incomes than before the crisis. Coupled with the $1,200 cheques sent out to most US taxpayers, nominal personal incomes rose above pre-virus levels in April, although they have probably fallen again in August because of the expiry of some of the more generous unemployment benefits.
- Overall, the US may be past the worst, but with a rise in the UK unemployment rate to 7% by mid-2021 in the UK and a fall in household incomes of 5.5% still to come, the full labour market adjustment has yet to be felt in the UK. This coupled with the drag from the uncertainty caused by Brexit means the UK economy will probably continue to lag behind the US in the race to recover from the crisis.
Chart 1: Unemployment Rate (%)
Chart 2: Unemployment Rate (%)
Sources: Refinitiv, Capital Economics
Sources: Refinitiv, Capital Economics
Workers Covered by Work Schemes (% of Q4 2019 Labour Force)
Coronavirus Job Retention Scheme (CJRS)
Worth 80% of salaries, falling to 60% in October.
31st Oct. 20
Paycheck Protection Program (PPP)
Forgivable loans for firms that pay at least 75% of salary.
8th Aug. 20
Canada Emergency Wage Subsidy (CEWS)
75% of normal hourly wages.
60-67% of workers’ net salaries.
84% of net salary, with 100% for those on min. wage, falling to 72% in October.
Cassa integrazione guadagni
80% of wages
Unemployment benefit up to 70% of original salary for first 6 months.
30th Sep. 20
Temporary Emergency Bridging Measure for Sustained Employment (NOW)
Firms must pay 100% of wages and can claim compensation for up to 90%, dependent on lost turnover.
31st Oct. 20
Sources: National Sources, Capital Economics
Ruth Gregory, Senior UK Economist, +44 7747 466 451, email@example.com