Pros and cons of coronavirus furlough scheme

Furlough schemes involve the government paying the wages of workers who would otherwise have been laid off. In the UK, the government pay 80% of wages up to £2,500 a month. Over 7.5 million jobs are now covered by the scheme. It is costing £8bn a month and has helped avoid a surge in unemployment. But, is it the best use of government money in the long-term.

The advantage of the furlough scheme is that it helps

  • To avoid a rapid rise in unemployment (and associated costs)
  • It avoids the financial (and emotional) costs associated with firing and then having to rehire workers.
  • During this shutdown, workers can maintain the security of employment.
  • It helps limit the damage of the recession by keeping money flowing in the economy, e.g. furloughed workers can continue to pay their bills and rent.
  • The logic of a furlough scheme is that the Covid-19 economic shutdown is a one-off, temporary event. Economic activity has been put on hold, and the hope is when it is over the economy can bounce back and these furloughed workers can go back to a productive business.

The alternative is to offer no direct wage support but focus on paying benefits to the unemployed. In the US, this has led to a surge in unemployment and has overwhelmed benefit offices, leaving many struggling to get the benefits they are entitled to.

Problems of furlough scheme

  • The main disadvantage of the furlough scheme is that it is very expensive. In the UK, the chancellor claims it is costing £8bn a month (an annual cost of just under £100bn)
  • Potential for fraud. Given the scale of the scheme, it could be easy for firms to fraudulently claim benefits when the worker is still working.
  • Such a generous scheme also provides incentives to claim benefits rather than restructuring business to the rapidly changing nature of the economy.
  • The longer the shutdown goes on the less likely certain sectors (and jobs) will bounce back. For example, with shops forced to close for four weeks, it makes sense to furlough workers for four weeks. But, if pubs and hotels need to remain shut for several months, in the long-term how viable will be these furloughed workers be? There is an understandable reason to support those who might be unemployed, but is a furlough scheme the most cost-effective way? The government could pay the wages of Nightclub employers for several months, but at the end of the scheme, these could become effectively ghost jobs – as there is no way to sustain them.

Transition to different economy

If the shutdown was a clean two month break, we might expect most jobs and sectors to remain relatively similar. However, this is now unlikely to occur, Covid-19 and social distancing could last for several months or years and this will require a prolonged (and difficult) shift in sectors of the economy and employment patterns. We are likely to see large drops in employment in certain sectors – leisure, hospitality, air travel. And hopefully, there will be gains in new areas, such as online entertainment, delivery drivers.

A furlough scheme could delay this transition as firms will understandably hang on to employees – even if when scheme ends their job may not be viable. In this case, the furlough scheme could be an expensive way to support a job that is no longer there in the new post-Covid world.

The opportunity cost of furlough

During 2010-16, I wrote many articles criticising austerity and the false belief of the danger of government debt. I’m glad in 2020, austerity and the need to balance the budget has quietly been put to one side. The government can borrow a lot and the Central Bank can print money. But, we don’t have unlimited spending power. There is still an opportunity cost of government spending. £8bn a month for the furlough scheme is a very high cost. By contrast, those who slip through furlough net are receiving universal credit, and this can be a meagre £409.89 per month (other benefits like housing may apply). This recession has highlighted for many – how low government benefits are. Many working people have bills far in excess of universal credit allowance. Rather than pay up to £2,500 a month for jobs that may not be viable, the government could be increasing allowances for universal credit or rolling out a universal basic income. This can be a fairer way to minimise poverty than putting £8bn a month in furlough scheme.

My concern is that the transition to a post-covid economy will be very difficult and could lead to a prolonged period of structural and demand-deficient unemployment. The most important thing is ensuring everyone has enough to meet the basic necessities of life and be supported in seeking the new forms of employment that will emerge.

 

Conclusion

The furlough scheme is a good idea. It was the right thing to do. But, the longer it lasts, the more we will ask whether the very high cost of furloughing is the best way to support workers caught up in the biggest shock to the economic system. Governments do the right thing to massively increase borrowing and try and maintain social spending. However, we should not stop thinking in terms of opportunity cost. The problem is that there are many very valid calls for government spending and it will be difficult to prioritise these in terms of social value.

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