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Labour market to suffer if furlough scheme scaled back too rapidly

The Resolution Foundation’s latest research found that the labour market is recovering steadily from the pandemic but warns of “dangerous complacency” regarding its strength.
Employees are coming off furlough at a rapid pace but the UK labour market is lukewarm rather than hot, as total hours worked remain well below pre-crisis levels and most vacancies are still relatively easy to fill despite the focus on shortages in some sectors, found the study published on Monday.

The Foundation’s research identified encouraging signs for the UK labour market. Its latest online YouGov-commissioned survey of 8,000 workers revealed that four-in-five employees who were furloughed during the first and second national lockdowns had since returned to work, while vacancy rates were higher than pre-crisis levels.

Nevertheless, total hours worked in the economy remained around 7% below their pre-crisis levels – a fall comparable to the height of the early 90s recession. Worryingly, it also found that around 10% of those who were self-employed before the crisis were no longer working.

Official data also hugely overstated the current level of pay rises, the Foundation said. Bumper growth in average weekly earnings of 5.6% in the three months to April was being driven by compositional effects as lower-paid workers dropped out of the workforce and the base effects of the deep economic shock in 2020, rather than a strong uptick in individual workers’ pay.

The government’s coronavirus job retention scheme was to be scaled back from 1 July. Employers would have to pay 10% of wages for furloughed workers, with the government paying employers another 70% of wages up to a maximum cap. The scheme was set to end on 30 September.

The Foundation also drew attention to the struggle to recruit in parts of the hospitality sector which was likely to be due to the speed of its reopening from an almost complete standstill.

Foundation analysis also showed that those who previously worked in the hardest hit sectors such as hospitality were 30% more likely to have taken jobs elsewhere mid-crisis.

Gregory Thwaites, Research Director at the Resolution Foundation, said: “The UK economy is bouncing back rapidly after a deep and painful recession. It’s particularly welcome to see so many furloughed staff back working again.

“But these encouraging signs risk breeding dangerous complacency, as people over-play the health of the labour market, and under-play the risks that still lie ahead.

“A recovering labour market is not the same as a recovered one. Labour shortages in hospitality aren’t a huge problem, and there is no real evidence of a new pay boom. Instead these things are part of the bumpy ride that emerging from a pandemic inevitably involves.”

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