Sunday 22 March 2020

How previous UK job retention subsidies compare with the Chancellor’s Covid-19 crisis scheme

The UK government is in the process of delivering a multi-billion package of economic measures to help protect businesses, jobs and incomes while our country tackles the Covid-19 virus. The package includes a Job Retention Scheme under which 80% of the pay of employees of participating private sector employers who agree to retain rather than lay them off during the crisis will be covered by the Exchequer, subject to a cap £2,500 per employee per month. It’s hoped that employers will top-up the payment so that employees receive a full wage but this is not a requirement.

Given the high incidence of low paid employees in sectors most directly affected by the civil contingency measures being taken by government to contain the spread of the virus – predominantly those providing services face-to-face to consumers - the average Exchequer payment is likely to be around £1,500 per employee per month. The JRS is initially proposed to operate for three months, though subject to extension if necessary, the main stipulation being that employees whose pay is covered by the scheme do not work (in the technical language used by government they must be furloughed i.e. given temporary leave of absence).

The gross financial cost of the JRS will depend on how many employees are covered, which won’t be known until the precise delivery mechanism is finalized and employers come forward to participate. Assuming a high level of take-up in current circumstances one can expect the cost to run to at least several £billion. But as with all such measures the net cost will differ from the headline cost. This is mainly because of corresponding savings in welfare benefit payments that would be made to employees laid-off. By the same token, however, it is the possible that some employees supported by the scheme will have been retained without it (the deadweight effect).

The Temporary Employment Scheme (TES) operated from 1975 to 1979 in the wake of the stagflation ushered in by the Oil crisis. This was succeeded by the Temporary Short Time Working Compensation Scheme (TSTWCS) which ran until 1983. I looked at both these schemes in the 1980s as part of wider comprehensive reviews of publicly funded employment programmes and subsidy measures. Sadly, this was before the arrival of the easy to use word processing packages we enjoy today, let alone electronically transferable documents, so I don’t have my reviews available to put online. However, my notes from the time include enough information to enable me to make a few comparisons with the JRS.       
Unlike the JRS, neither TES nor TSTWCS required subsidized employees to be put on furlough. In stark contrast to what is likely with JRS, the earlier schemes were almost entirely taken up by manufacturing employers (manufacturing then not only still accounted for a really big share of total employment but was also the sector government industrial policy mostly focused on).

All job retention schemes also raise concerns about possible negative effects on labour productivity. When applied as temporary measures during economic crises, such schemes are explicitly designed to sacrifice productivity in favour of employment in the short-term. The primary aim is to both reduce the social cost of joblessness and aid subsequent economy recovery by ensuring that attachment between employers and employees is maintained so as to preserve employee skills and experience. Ultimately, however, subsidies need to be withdrawn lest employers become dependent upon them and/or labour productivity be constrained by employees failing to move from less productive to more productive activities. I doubt if too many economists are greatly worried about this in the current crisis but it will be a consideration when Covid-19 is finally behind us and JRS is withdrawn. The end of TES in 1979 is thought to have exacerbated the big shake-out of manufacturing jobs in the early 1980s, which resulted in improved productivity but also gave rise to considerable social adjustment problems.                

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