UK Coronavirus Job Retention Scheme – What it is and how it might evolve in H2 2020

Andrew Watson our consultant managing the role
Posting date: 20 May 2020

Coronavirus Job Retention Scheme (JRS) is the UK’s response to economic impact of the COVID-19 outbreak.  The JRS was launched in March 2020 - the aim of the scheme is twofold, protect lives and mitigate the economic impact of the crisis.   It is currently costing UK Government £9.4bn a month to pay 80% of the wages of 7million workers in furlough.  The result has been a mitigation of UK unemployment; and companies have been able to continue, even if trading has ceased or diminished. The total cost by Year End 2020 is likely to be £48bn with companies starting to pick up the costs directly, resulting in a rise in unemployment.

Based on a research paper by the Resolution Foundation, this short blog lays out the principles and impact of the JRS.

The what and why of the UK Job Retention Scheme

Prior to the CV-19 outbreak, the UK unemployment rate was 4%, largely unchanged for the past 12 months.  The UK employment rate was at a record high of 76.6% (source ONS).  The new unemployment figures are expected to rise to 9% when released on 19 May - the highest unemployment rate in more than 25 years.

JRS, introduced in March 2020, covers 80% of a furloughed employee’s usual monthly wage, up to £2,500 a month, plus the associated National Insurance contributions and pension contributions.  The reason for JRS is simple, the economic impact of CV-19 has impacted devastated some industry sectors. 

In the chart above, 80% of UK hospitality and recreation business had ceased trading by mid April.  Interestingly, by comparison, only 5% of IT or Communication businesses had ceased trading. It is worth noting that after the 2010 recession, the hospitality and non-food retail  sectors accounted for 10% of total employment, but 22% of employment for people previously unemployed. 

How is JRS working so far?

The scheme has been extended and has been extended to October 2020.  JRS is working but hugely expensive, costing £8bn so far. 

What happens next with JRS?

Further more, at somepoint the costs will outweigh the benefits of the scheme.  

With social distancing (and the health risks driving them) set to continue until Q1 2021, the pace of easing restrictions will be managed on a sectoral basis, with construction and manufacturing activity encouraged to get going again immediately, while the reopening of shops will wait until June, and our hospitality sector will need to wait until at least July for the first signs of reopening.

If it’s costing so much, why can’t JRS be stopped now?

If Rishi Sunak removes the JRS too quickly, the impact on the UK economy would be even more devasting – pushing the recovering into 2025 instead of 2022.  There are two reasons for this.

1. Unemployment in the UK has been low despite the recession of 2008 because of wage flexibility.  Companies were able to lower output by allowing real wages to fall, rather than cutting jobs.  In a CV-19 hit economy, this is unlikely to happen.  

2. The industry sectors that traditionally drive employment recoveries are the same ones hardest hit (hospitality and retail).  In 2010 and 2011, hospitality and non-food retail accounted for just 10 per cent of employment, but 22 per cent of employment entries from unemployment. 

How to end JRS

JRS cannot continue until the economy is back to normal.  The period between lockdown and a return to normality will be a long one, dominated by social-distancing restrictions and probably lasting until we have a vaccine. 

Firms need to face up to their long-term sustainability challenges once the future looks somewhat clearer. For businesses facing years of lower revenues, UK government-subsidised business loans are not to be a sufficient solution. The Government will need to consider grants and equity stakes if it wishes to continue support to the hardest-hit firms, with tough choices about which firms it is prepared to see disappear entirely (Virgin Atlantic take note).

There is a growing concern by companies that focus and care needs to be taken of the motivation of employees as they return to work and how quickly they will return to pre CV-19 levels of productivity. An example is the reticence of teachers and public transport staff to return to work before they are satisfied about health and safety in their workplaces.  

McKinsey published a good research paper on a strategy to suppress the economic impact of the virus and shorten the duration of the economic shock.  Titled Beyond Coronavirus: The path to the next normal, McKinsey suggest a 5 phase structure to win the economic battle against COVID-19.

  1. 1. Resolve
  2. 2. Resilience
  3. 3. Return
  4. 4. Reimagination
  5. 5. Reform

Source: McKinsey

Reimagine and Reform

Based on the deep and extended economic impact of CV-19, I draw your attention to the Return-Reimagination-Reform phases.  Companies need to start studying and planning for what happens when the “shock and awe” of CV-19 recedes.  Their ecosystem of suppliers, customers, partners, regulators etc will all change.  It’s too early for clear vision of what the mid to late CV-19, but I suggest the following are critical as we go into mid 2020:

  • Gather and maintain knowledge & insight on what your suppliers, competitors and customers are doing in CV-19 response-mode, not so much about how they handled the crisis phase of March-June, but for what are doing for H2 2020
  • Workplace flexibility is a must in terms of employment structures, jobs and, above all, mind-set
  • Diversify and/or reform core business activities
  • Ensure your leadership teams have the resilience, imagination, team spirit and agility for the Reimagination and Reform stages

The JRS programme is mitigating the economic damage for companies and their employees, but effort now need to gently but increasingly start on the Return, Reimagine and Reform phases.

This won’t be a V-shaped recession-recovery, but equally I don’t believe it will be as bad as the 2008-2010.  The main cause of the recession in 2008 was malpractice and weak financial market infrastructure.  2020 recession has been caused by government-led lockdown in the face of a medical emergency. Helped by JRS and subject to a vaccine being developed and distributed in a reasonable timeframe, our underlying economic situation can recover better than expected. 

Key Points:

  • UK economy in Q2 2020 is expected to shrink by around 15%
  • Economic impact of Coronavirus is very uneven – e.g. 80% of UK hospitality and recreation businesses ceased trading by mid April.  By comparison, only 5% of Information /Communication businesses had ceased trading
  • UK unemployment rate prior to Coronavirus was 4%.  Figures for February-April 2020 will be released on 19 May.  Expect an increase in unemployment to around 9%
  • Coronavirus Job Retention Scheme (JRS) is currently costing UK Government £9.4bn a month to pay 80% of the wages of 7 million workers in furlough
  • The total cost of JRS by Year End 2020 is likely to be £48bn, the majority (£28bn)  taking place April-June
  • If JRS is removed too quickly, the impact on the UK economy will be worse and unemployment rate doubled.  Result would be an even longer recovery period, lasting into 2025
  • Social distancing (and the health risks driving them) will continue until Q1 2011
  • There will be resistance by employees to return to work until health & safety considerations are proven
  • New working methods will arise but employees will not automatically understand or embrace the changes
  • Business leaders need to lead not manage
  • High unemployment is going to be a feature of Britain in the early 2020s
  • In H2 2020 there will be a phased reduction in the JRS as businesses start to contribute, the % of wage is reduced and the salary cap reduced
  • In 2022, the UK GDP should return to £2.2trillion level of 2019

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