There may not be many reasons for optimism about the economic outlook, but one is the relative flexibility of the UK labour market. This should help unemployment to fall back and activity to recover more quickly – provided government gets out of the way.
There is no doubt that many jobs are being lost as a result of the coronavirus crisis. The data over the next few months will look horrible. My own guesstimate is that the unemployment rate will jump to around 8%. That would be bad enough, but others are even more pessimistic. The OBR’s first attempt at a ‘coronavirus reference scenario’, published in April, predicted a surge to 10% – an increase of more than 2 million in the number of people without work.
However, the labour market did at least enter the crisis in good shape. The employment rate was a record high of 76.6% in the three months to February, with over 33 million in work. The unemployment rate was only 4%, compared to more than 7% in the Euro area.
At this point, someone always observes that a person only needs to do a minimum of one hour’s paid work per week to count as employed in the official data. But this is a standard, internationally recognised definition. In practice, the proportion of those in employment working less than 6 hours per week is tiny (1.5%) and has actually fallen slightly since the 1990s (when it was about 2%). In contrast, the proportion who are usually working what might be called ‘full-time’, that is between 31 and 45 hours, is close to its record high of about 55%.
There are some more valid concerns about the quality of some jobs and about productivity in general. Real wage growth has been weaker than might have been expected if the UK were indeed close to full employment. Nonetheless, even measures of under-employment (such as those calculated by Bell and Blanchflower) have also fallen sharply since the global financial crisis and were relatively low before coronavirus struck.
Above all, there is ample evidence that the UK labour market is good at creating jobs to replace any that might be lost, and at filling vacancies when people drop out. This flexibility can be measured in different ways, but about 4 million people move into employment every year having previously been either unemployed or economically inactive.
So, what should the government be doing? Like most people, I was a strong supporter of the Coronavirus Job Retention Scheme (CJRS) when it was first introduced, despite concerns about its fiscal costs. The grants covering 80% of the wages of millions of furloughed employees have clearly helped to limit job losses and protect incomes. The CJRS has also allowed fundamentally sound businesses to avoid the costs and uncertainty of having to fire workers during the lockdown and then rehire them when the economy reboots.
However, the longer the CJRS remains in place, the greater the risk that it actually becomes a drag on the recovery. For a start, the fiscal costs are mounting. The OBR originally put the bill at £42 billion, but it will probably be substantially higher now that the scheme is being extended and many more people are being covered.
Of course, some would argue (as I have) that even £60 billion would be a price worth paying to prevent mass unemployment and all the additional economic and social costs that would bring. But it is also important to take account of the distortions and perverse incentives that the CJRS is creating, which will become an even bigger issue once the lockdown is eased.
For example, the CJRS reduces the incentive for people who can safely return to work to do so, or to find alternative employment. It also protects businesses that should actually be allowed to fail, not just those that can continue to thrive in the ‘new normal’ (whatever that may be). It feels brutal to talk in terms of ‘creative destruction’ and the elimination of ‘zombie businesses’, but this is the right way to think about supporting the recovery.