Why the labour market won’t return to normal

When the face of chan­cel­lor Rishi Sunak is plas­tered all over the media, work­ers and busi­ness­es across the UK know the Treasury’s mag­ic mon­ey tree is being shak­en again. First it was the Coro­n­avirus Job Reten­tion Scheme, then the Job Sup­port Scheme and most recent­ly its expan­sion in the wake of forced local lock­downs.

The econ­o­my-wide fur­lough scheme has cost an esti­mat­ed £50 bil­lion to date and has been an extra­or­di­nary inter­ven­tion in the job mar­ket. Yet gov­ern­ment sup­port that paid up to 80 per cent of staff wages stops at the end of Octo­ber. Beyond this, employ­ers will have to shoul­der a much high­er share of the labour bill, if they want to keep staff on their books.

Incentivising employers to keep staff on

“The Coro­n­avirus Job Reten­tion Scheme was designed ear­li­er in the year when there was talk of a V‑shaped eco­nom­ic recov­ery and every­one thought it would be over by Christ­mas. The pri­or­i­ty then was to keep the econ­o­my frozen so it could bounce back as quick­ly when the pan­dem­ic was over,” explains Xiaowei Xu, senior research econ­o­mist at Insti­tute for Fis­cal Stud­ies.

“Six months on, things are look­ing dif­fer­ent. There has been a lot of talk about how the new Job Sup­port Scheme, or JSS, does not incen­tivise employ­ers to keep work­ers in jobs that don’t face demand right now, unless it would be more cost­ly to replace them lat­er. But this is not a design flaw, this is very much a design fea­ture.”

Under the new scheme, start­ing in Novem­ber for six months, the UK gov­ern­men­t’s con­tri­bu­tion to pay pack­ets falls sharply to 22 per cent, unless busi­ness­es are forced to shut by law due to COVID-19, then work­ers will get two thirds of their wages paid by the state. The chan­cel­lor has said the aim now is only to sup­port viable jobs.

“The JSS assumes firms can afford to bear the cost of keep­ing work­ers on the pay­roll yet, with eco­nom­ic demand sup­pressed, the incen­tive for busi­ness­es to retain work­ers is reduced. With the exist­ing sys­tem of ‘fire and rehire’, it’s like­ly firms will lay off work­ers rather than engage with the new scheme. There is now a real fear of ris­ing unem­ploy­ment,” says Pro­fes­sor David Spencer at Leeds Uni­ver­si­ty Busi­ness School.

The rise of the zombie economy

The Cen­tre for Eco­nom­ics and Busi­ness Research has already raised its unem­ploy­ment fore­cast, pre­dict­ing 1.5 mil­lion more peo­ple could lose their jobs by Christ­mas, with the job­less rate climb­ing to 8.5 per cent. “We are cur­rent­ly in an unprece­dent­ed eco­nom­ic cri­sis; it’s hard to over­state the mag­ni­tude of the prob­lem,” says Pro­fes­sor Michael Dev­ereux, direc­tor of the Oxford Uni­ver­si­ty Cen­tre for Busi­ness Tax­a­tion.

The ongo­ing pan­dem­ic is now dri­ving struc­tur­al change in the UK econ­o­my, with many firms wak­ing up to the fact that a pre-COVID nor­mal isn’t return­ing soon; think of those in the arts, hos­pi­tal­i­ty or air­line indus­tries. Some jobs that were pre­served by fur­lough are now obso­lete. Accord­ing to a think tank Onward, one in five UK busi­ness­es may well be “zom­bie com­pa­nies”, mar­gin­al­ly prof­itable firms inca­pable of dynamism or inno­va­tion. 

We are cur­rent­ly in an unprece­dent­ed eco­nom­ic cri­sis; it’s hard to over­state the mag­ni­tude of the prob­lem

“Sup­port­ing the illu­sion that every­thing is going to go back to nor­mal fails to incen­tivise employ­ers to make rapid deci­sions to restruc­ture and delay nec­es­sary, as well as, painful adjust­ments until it’s too late to save a busi­ness. It makes work­ers less like­ly to agree to rad­i­cal work­place changes in their exist­ing employ­ment or seek new jobs. By tying them to exist­ing employ­ment, the JSS may pre­vent work­ers from access­ing retrain­ing or mov­ing to new sec­tors,” says Pro­fes­sor Len Shack­le­ton, fel­low at the Insti­tute of Eco­nom­ic Affairs.

“The UK already has many zom­bie com­pa­nies as a result of low inter­est rates, which are neg­a­tive in real terms. Many will have fall­en by the way­side dur­ing the pan­dem­ic, but this may have been off­set by new­ly cre­at­ed zom­bie firms access­ing gov­ern­ment-backed loans and fur­lough­ing staff.”

Westminster must get serious about job creation

Ear­li­er this year, the Euro­pean Union pro­posed a “Mar­shall Plan” for eco­nom­ic recon­struc­tion post-COVID, refer­ring to the recov­ery led by Amer­i­ca fol­low­ing the Sec­ond World War. The UK is going to need some sim­i­lar pol­i­cy grand­stand­ing, as well as real action, if it’s not to be drowned by a tsuna­mi of the job­less, as well as the media flot­sam and jet­sam, that’ll ensue.

“West­min­ster needs a plan for jobs, one that will facil­i­tate a struc­tur­al evo­lu­tion, such as large-scale invest­ments by the gov­ern­ment in the pub­lic sec­tor. There are real needs to be met in the econ­o­my and expan­sion of the pub­lic sec­tor could help to cre­ate many social­ly use­ful jobs,” says Spencer at Leeds Uni­ver­si­ty Busi­ness School.

“There is also a need for bold­er think­ing around a Green New Deal and green tech­nol­o­gy invest­ments. The gov­ern­ment can bor­row at low rates at the moment and could use pub­lic spend­ing to pump-prime the econ­o­my, stim­u­lat­ing pri­vate sec­tor jobs in the process.”

Making a path to a new job market

In many eco­nom­ic sec­tors, COVID-19 has been a cat­a­lyst for change, accel­er­at­ing already exist­ing trends by up to five years. The UK labour mar­ket is not immune to this, albeit stymied by fur­lough schemes.

“The trends which have been grow­ing towards a total­ly flex­i­ble labour mar­ket, where indi­vid­u­als make them­selves avail­able for ‘gigs’ will be rapid­ly speed­ed up. As old­er work­ers retire or are forced out and a new gen­er­a­tion enters the job mar­ket, they will demand work and pay, as well as flex­i­ble ben­e­fits that suit their lifestyles,” says Mer­rill April, part­ner at law firm at CM Mur­ray.

“It is like­ly that some skilled work­ers will be lost, but they may exist in a ‘tal­ent pool’ some­where and be brought back although on much infe­ri­or terms or as self-employed free­lance con­sul­tants.”

The Unit­ed States, where fir­ing and hir­ing is easy, has long sup­port­ed unem­ployed work­ers through its ben­e­fit sys­tem. Dur­ing the pan­dem­ic, the focus has been on gen­er­ous­ly giv­ing mon­ey direct­ly to work­ers instead of jobs teth­ered to firms. Dur­ing COVID-19, this has allowed a much more flex­i­ble labour mar­ket to shift to where new demand has arisen, say from hos­pi­tal­i­ty to online gro­cery deliv­er­ies.

“Enhanced redun­dan­cy pack­ages, rather than con­tin­u­ing wage sub­sidy, makes bet­ter sense. Con­tin­u­ing sup­port should be con­fined to a very nar­row group of busi­ness­es where there is a strong expec­ta­tion of future recov­ery, even in a world per­ma­nent­ly changed by the pan­dem­ic,” says the Insti­tute of Eco­nom­ic Affairs’ Shack­le­ton.  

“A fun­da­men­tal shift to dereg­u­la­tion would help. There is no short­age of entre­pre­neur­ial tal­ent in the UK, but we must ensure it is not helped by reg­u­la­tion designed for a dif­fer­ent era. The focus has to be on jobs, jobs, jobs.”

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