Furlough Scheme enters its final month in September

The Furlough Scheme, which has been running since April of last year, is coming into its final month in September as the final bill for the scheme is predicted to be upwards of £70 billion.

The Furlough Scheme, which used to have the government contribute 80% towards workers wages, now only contributes 60% in August as employers chip in with an extra 20% to ensure that once the scheme finishes, employers do not find themselves dealing with drastically increased costs.

Nevertheless, the government does still contribute towards 60% of a workers wage, meaning that once this contribution is cut off, British firms will find themselves experiencing increased costs.

This is because the wage bill of firms will increase as the Furlough Scheme supports 1.75m employees as of the 2nd of August, with an estimated 1.5 to 2 million employees, that “at least half are working some hours each week,” the ONS reports.

This means that once the wage subsidy has finished, private firms will have two choices, either to pay the full wage of an extra 1.75 million employees, or, to begin laying off workers or decreasing their hours.

The bill for employers keeping a member of staff on furlough was £155 per month in June, £322 in July and £489 in August and September, the BBC reports.

Therefore, with this next change in Furlough payments, private firms may have to begin laying off workers or perhaps decreasing their hours in an effort to reduce costs and to maximise profits.

The reason why this is made possible is due to the fact that the majority of Furloughed individuals work in hospitality, an industry that is notorious for zero-hour contracts.

Although this is an effective way of cutting costs, as decreasing a wage bill for a business is felt almost instantly, laying off workers would have an adverse effect on the entire economy.

The UK’s unemployment rate has been slowly declining since December 2020, a trend that parallels with the UK’s successful vaccine rollout which has led to rising consumer confidence in the economy.

This boost in consumer confidence means that consumers spend more as higher certainty within the economy and labour markets means that individuals feel like they will retain their employment, because of this, they are more likely to spend.

And spend they did as once lockdown restrictions were lifted, the UK has been forecasted a spending spree of up to £50 billion, the Guardian reports.

This means that, because consumers are spending more, consumption, a component of aggregate demand rises, consequently, aggregate demand sees a net increase.

This can also lead to a multiplier effect as consumers spending extra cash means businesses see a rise in demand, resulting in the price mechanism kicking in as higher demand raises the price of goods and services.

However, as prices rise producers are incentivised then signalled to increase their factor inputs to raise output, for this reason even though firms will see an increase in labour costs as Furlough ends, they may not actually lay off workers as firms are currently looking to expand their output as UK vacancies are at a record high of 953,000 in July, the ONS reports.

For this reason, the ending of Furlough may not actually reverse the current downwards trend in unemployment as firms are looking to hire more workers to accommodate the recent surge in demand which we have seen as the UK economy opens up.

This means that although vacancies may decrease due to rising labour costs, there may be little to no offset in unemployment once when Furlough ends.

However, the Guardian reports that a winter surge of COVID-19 may force Rishi Sunak to change his decision in future.

Whether such a winter surge occurs is unknown, and, whether Furlough will be reintroduced is also uncertain as the £70 billion bill combined with record levels of government debt make the wage subsidy scheme ever so more expensive as the long term opportunity cost of debt-interest repayments is becoming more and more unfavourable. If a new wave of COVID-19 was to strike, however, the UK economy could potentially see itself in a very turbulent period as the likelihood will be that the progress which we have seen in the past few months regarding growth will be undone, a trend which will make the already recovering labour market ever so turbulent.


Written by Hubert Kucharski

Research compiled by Billy Ryan

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