Furlough is here to stay – in the UK, at least until March. Simeon Djankov (LSE) argues that making part of furlough income portable would encourage people to move into new work, rather than propping up doomed jobs.
Every advanced economy has funded job support programs to assist workers during the pandemic. The ideology of these programmes differs markedly across the Atlantic, however. The US policy view is to wait until companies lay employees off, then give unemployed workers financial assistance so they can find a job in another firm — or in an entirely different sector. In contrast, Germany, France, Italy and the United Kingdom encourage companies to retain workers in their jobs. This job retention is achieved through furlough schemes or shortened work week programmes (such as the German Kurzarbeit or the French Activité partielle), which are paid by the public purse.
The initial job market reactions differed substantially as a result. The US unemployment rate spiked to nearly 15 percent in April 2020. By comparison, the German and UK unemployment rates rose to 4 percent that month.
The high cost of supporting jobs
As the recovery has dragged, fiscal resources for job support become strained. This strain may get even worse with the rising second wave of COVID infections, which has led to new constraints on business activity in France, Germany, Italy and the UK.The fiscal outlays for supporting workers have been enormous everywhere. Italy, for example, paid 45 percent of its labour force 80% of gross wages – capped at €998 for wages up to €2,159 and at €1,199 for wages above that level – during the second quarter of 2020. The US income support scheme has already been depleted: it lasted from March through the end of July. The Congress legislated generous weekly payments of an extra $600 a week for the unemployed, with a one-time $1,200 stimulus cheque. But the US administration has failed to extend this assistance or offer an alternative.
The furlough scheme in the UK was set to expire at the end of October 2020, but has been extended until March. The job retention schemes in France, Germany and Italy have become part of new recovery plans and will last into 2021. For example, France is spending a further €19 billion on job retention and vocational training as part of its September recovery plan.
Making furlough portable
Policies on job retention in Europe may evolve to support reallocation across firms and sectors. In particular, the benefit of a furlough scheme (in France, for example, 84% of the employee’s wage, paid from the public purse in highly affected sectors) can be made portable, so that an employee who can find a job in another firm or another sector has an incentive to make the move. For the limited duration of the programme – up to six months – the mobile worker receives the new salary plus part of the furlough income. Such portability arguably benefits economic recovery. For example, if tourism shrinks so much that resorts only need a fraction of their employees, then it is better for these hospitality workers to look for new careers rather than for the government to save their existing jobs for a few extra months.
This flexibility would allow reallocation of resources towards other firms and sectors, or towards newly-created firms, allowing for a form of creative destruction to take hold. The windfall gain that accrues to the worker from receiving the new salary plus part of the furlough income is a price worth paying to motivate such reallocation.
Portability can be further enhanced through investment in remote work options. Germany, for example, is investing €15 billion in digital technologies as part of its July 2020 recovery plan to connect more workers to remote jobs. This possibility enables new work options without worrying about housing, schools and transport logistics. It is part of broader green recovery programmes in France and Italy too.
This post represents the views of the author and not those of the COVID-19 blog, nor LSE.