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Furlough vs. Unemployment Support - which is best?

In this blog post Alan Newton, of the IFoA’s COVID-19 Action Taskforce (ICAT) Social Security group, looks at the characteristics of various forms of government income support during the pandemic and discusses the challenges of assessing their value to society. 

Many of the countries hit hardest by Covid-19 have created some version of a furlough scheme. In the UK the original scheme has paid workers up to £2,500 per month while their roles have been put on hold. Italy and Brazil introduced similar schemes. In France a long-term partial work scheme has recently been approved which could see employees furloughed for up to 40% of their time for up to two years.

The USA is an exception to this trend amongst developed economies. Instead of implementing a furlough scheme it opted for a significant increase to unemployment benefits, initially up to an extra $600 per week. This caused the unemployment rate to jump by more than 10% in April. The extra payments have now been reduced to $300-400 (depending on state).

There are advantages to both a furlough approach and an unemployment benefit approach to dealing with the economic fallout from the pandemic. A furlough scheme protects existing jobs, theoretically allowing for a quick return to work when conditions allow. However, mass job losses with enhanced unemployment benefits has the potential to ready the workforce for change that may be unavoidable in some sectors of the economy, such as retail, leisure and travel.

A furlough scheme may simply put off the inevitable for some jobs, kicking the redundancies down the road. In the UK, this is likely to play out in the short term as the current furlough scheme winds down and employers are obliged to cover more of their furloughed employees wages each month.

Conversely, allowing mass job losses may result in many workers re-entering the workforce in very similar jobs, possibly filling the exact same roles they left in March. However, the out-of-work today do not have the same confidence and bargaining power as the workforce did in January. This could lead to a deterioration in pay and working conditions for some sectors of the economy which are actually able to recover quite quickly.

The merits of either approach depend on the aim. Whilst all nations dealing with the pandemic will have the same general aim, protecting the welfare of their citizens, the specific aims of each country will depend on philosophy of those in power and, ultimately, the views of voters.

From an actuarial perspective we’re interested in the approach that provides Nullthe greatest net value over both the short and long term, considering both the observable cost of the financial stimulus and the value to society of the activity. The latter is not directly observable and very subjective.

So how do you go about placing a value on the societal benefit of these kinds of interventions?

In simplistic terms we could simply consider the number of people moved into long term unemployment once the schemes wind up, either because their furloughed job disappears or because they’re unable to find employment following the period of enhance unemployment support. Society rightly places a high cost on long term unemployment due to the financial and psychological strain put on those affected. Plus the unemployed are not contributing to the economy. Loss of income is a relatively easy part of the calculation to estimate and could vary by sector, age, education.

However, the cost of disenfranchisement from society of the long term unemployed is not so straight forward. Would a higher cost be attributed to the younger workforce who are unable to secure the kind of entry level positions that were available to their slightly older peers, positions that may set them on a career path? Alternatively, would a higher cost be placed on the older working age, people who still have 5-10 years until they can claim their pension and may struggle to re-enter the workplace?

Mitigating actions, such as apprenticeship schemes or a temporary reduction to the state pension age could help. However, such actions could be expensive and the expected benefit should not be overstated.

Following recession in the 1970-80s, the UK government experimented with vocational training initially as a stand-alone offering (TOPS) and then with an on-the-job element (YTS) with debateable success. Furthermore, the UK Job Release Scheme in the same period resulted in material level of early retirement amongst older workers, but evidence for this contributing to a reduction in youth unemployment at the time is not strong.

Ultimately, the success of short-term furlough or unemployment support schemes depends on ensuring large numbers of people do not become long term unemployed. This in turn depends on more than just the design of such schemes, including health (vaccine availability, treatments, testing) and economic (market incentives, tax) policy decisions.

Sources:

US unemployment https://tradingeconomics.com/united-states/unemployment-rate

International Labour Organisation, 2014