LONDON—A U.K. experiment in preventing mass layoffs is coming to an end, in a test of how quickly economies can reabsorb workers idled by the pandemic and wean companies off government support.
The closure Thursday of the Coronavirus Job Retention Scheme marks the first big move by a European government to step back from the emergency economic policies in place since the virus swept the continent last year.
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European capitals spent big on wage subsidies to prevent shutdowns triggering job losses. The goal was to hit the pause button on the European economy, allowing for a smooth restart once the worst of the pandemic was over.
The U.S. took a different tack, choosing instead to let unemployment rise while at the same time dishing out checks to households to keep them afloat.
How the U.K. labor market fares without that support will offer clues to other governments on what to expect when they, too, dismantle or dial down their own job programs. The U.K. is turning off the program during a soft patch for the global economy as supply-chain disruptions and worries over the Delta variant of the virus hit growth.
A rise in unemployment is likely in the short term, according to most economic forecasts, and the program’s closure may bring pain to workers and firms in sectors still hurting from efforts to contain the virus. Employers in the U.K. aren’t required to keep workers on their payroll after the program ends, nor are employees obligated to return to their employer.
But economists and many employers are broadly optimistic that the retention scheme’s closure won’t cause severe problems for the wider British economy, as mass vaccination and the lifting of Covid-19 restrictions have allowed most businesses to reopen and the economy to begin climbing out of its steepest downturn in 300 years. Job vacancies are at a record high.
“For me, I think it makes sense for it to come to an end,” said Stuart McPhee, director of Siberia Bar & Hotel in Aberdeen, Scotland. When the pandemic was raging and his business shut, he said, all 31 of his employees were being paid through the program. Now none of them is and he is grappling with filling vacant posts, as some of his staff moved on as lockdown eased.
European governments have spent billions subsidizing workers’ wages to prevent a sharp rise in joblessness during the pandemic. Countries including France, Denmark, Sweden and Ireland developed programs modeled on Germany’s longstanding Kurzarbeit system, an insurance program that allows workers to cut their hours rather than lose their jobs, with their wages being topped up by the state. Most are still in operation though some governments have scaled back the level of state support.
The U.K. set up its job-retention program in spring 2020. The government would pay 80% of the salaries of idled workers and at its height in April that year around 9 million workers—almost a third of those employed at the time—had their wages subsidized by the state. State support has gradually reduced in recent months, with employers paying more toward furloughed workers’ salaries. The program is expected to cost around £70 billion ($84 billion) overall, or around 3.6% of 2020 gross domestic product, according to estimates by the Resolution Foundation, a nonpartisan think tank focused on living standards.
On several measures, the European approach has been a success, economists say. The unemployment rate in the U.K. peaked in November 2020 at 5.2%, and has since fallen back to 4.6%. In the U.S., unemployment came close to 15% in April last year and is still higher than it is in Britain, at 5.2%.
Germany, France and Italy all saw unemployment rise during the pandemic but their own job-support programs limited the rise compared with the U.S. Participation in the labor force during the pandemic also declined by more in the U.S. than it did in the U.K. and major EU economies.
Yet some economists worry the programs may prevent people from moving to where their economy needs them most, holding back the labor-market reshuffling required for a durable burst of growth. The U.S. has already recovered its pre-pandemic size; the eurozone and U.K. economies haven’t.
There were 1.6 million U.K. workers still in the jobs program at the end of July, around 5% of the 32 million currently employed. That is 60% fewer than at the end of last year. Another 1.6 million people were unemployed in the three months through July.
Data suggests most of those who came off the program went back into employment—the number of people on company payrolls rose for the sixth straight month in August and now exceeds its pre-pandemic total.
Daniel Tomlinson, senior economist at the Resolution Foundation, said there is a good chance many of those still in the program will return to their old employer, since businesses have been paying a growing share of the pay of those fully furloughed as government support has been reduced.
Still, employers in some sectors expect to make layoffs.
the general secretary of the TSSA transport and travel union, said the end of the program was likely to lead to thousands of job losses across his sector, which is still struggling under travel restrictions world-wide.
All three of Jonathan Rosenfeld’s employees at the SoHo Travel agency in London have been on furlough since the program started. Business has picked up but he said his revenue remains around 60% below its pre-pandemic level. He plans to keep his staff on, but is negotiating reducing their hours and salaries until business recovers.
“There is no way just when furlough finishes everything is going to return to normal,” he said.
The hope for the wider economy is laid-off workers will be able to swiftly find new jobs. Official data shows there were just over 1 million job vacancies in the U.K. in the three months through August, more than twice the number of openings a year ago and the highest on record.
Matching available workers to openings in the U.K. likely won’t be smooth. Sectors with large numbers of furloughed employees include wholesale and retail, accommodation and construction, while shortages are being felt in other sectors such as healthcare, food and transportation. Shortages of truck drivers, for instance, have led to empty supermarket shelves and long lines for gasoline.
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, a consulting firm, estimates that around 70% of those still in the program will resume work with their old employer once it comes to an end. Around 80% of those will likely return full-time to work but 20% will return on fewer hours than they would like.
The remaining 30%, he estimates, will be laid off or quit voluntarily. Some will find new jobs, others will stop looking for work, perhaps to emigrate or retire, and the remainder will join the ranks of the unemployed.
Economists expect the unemployment rate to rise in the final quarter of the year as support for the labor market is withdrawn. Private-sector forecasts compiled by the U.K. Treasury show economists expect the jobless rate to peak at 5.3% in the fourth quarter before falling back in early 2022.
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