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    Kate Andrews

    Winding down furlough will reveal the post-pandemic economy

    Winding down furlough will reveal the post-pandemic economy
    Photo by JUSTIN TALLIS/AFP via Getty Images
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    The furlough scheme begins to wind down today, as employers will now pay 10 per cent of their staff’s salaries, while the government continues to stump up 70 per cent of their wages. Employees won’t notice a change to their income, which will still be 80 per cent of their monthly wage, with a cap of £2,500. The question, however, is to what extent employers feel the financial sting, and whether it leads them to scale back their workforce.

    The numbers on furlough have been coming down steadily since economic activity liberalised in April. According to official government estimates, May alone saw one million people come off the scheme, as indoor hospitality and more of the services industries were allowed to reopen. But around 2.5 million people remain furloughed or on flexi-furlough, some of whom will have had the government paying their wages for close to sixteen months.

    Some will still be hanging in there for 19 July – which increasingly looks likely to deliver a comprehensive ‘freedom day’ – as this will be the first time their sector (think nightclubs) has been allowed to reopen since the pandemic hit. But the tough reality is that, with the end of furlough slowly nearing sight, others will need to brace themselves for their job no longer existing.

    For many employers, the decision of whether to hold on to their full staff will come down to confidence in the government’s new reopening date of 19 July. Delaying by four weeks won’t have done the labour market any favours – but the remarkably different noises coming from new Health Secretary Sajid Javid will give them reasons to be hopeful, including his insistence that the ‘most immediate priority’ is to get society open again. But for others, a discovery process is about to unfold, about how consumer behaviour has shifted over the past year and a half. The dramatic shift to working from home (which for many companies may now be here to stay, at least in some hybrid form) will mean that some businesses designed to cater to office workers are no longer viable.

    This all but guarantees an uptick in unemployment; the question remains just how high it goes. Furlough has proven itself a a big success in keeping the unemployment rate under control: while there has been an increase in those out of work, the official figure is currently under 5 per cent: a huge triumph considering the OBR’s forecast last year estimated unemployment hovering close to 12 per cent this summer – an even worse state of affairs than what workers experienced post-financial crash. Predictions now suggest unemployment peaks below 6 per cent; coming out of the largest economic contraction in 300 years, such an outcome would also validate the furlough scheme. But it means the current rate would still be set to rise, with every uptick reflecting personal stories of workers discovering what it means to be unemployed.

    Calls are growing for Rishi Sunak to extend furlough yet again, in the hopes that more government support might save more jobs. But others acknowledge that the labour market is going to have to catch up to new consumer demands eventually. A few weeks ago Andy Haldane, outgoing chief economist at the Bank of England, told The Spectator that tapering furlough is ‘probably overdue’, to allow for workers in lost jobs to shift into new areas of employment.

    We may be about to witness seemingly contradictory figures over the next few months: the economy returning to pre-pandemic levels, but unemployment increasing as well. This sets yet another challenge for the government: to explain in clear and compassionate terms why this is happening, and more importantly, to craft public policy to make it as easy as possible for employers to recruit and retrain new workers.