Leave scheme minimized household financial distress, new study finds

From March 2020 the government pays 80% of salaries up to a maximum of £2,500

As the Job Retention Scheme (Furlough) draws to a close in the UK, a paper published by the University of Birmingham has concluded that the government-designed scheme preserves a worker’s job during the COVID-19 pandemic. 19, but it causes a substantial drop in monthly income which can trigger financial hardship.

Research by Christoph Görtz, Danny McGowan and Mallory Yeromonahos of Birmingham Business School using household survey data from the Understanding Society database provided first-hand evidence on whether the leave in the UK was designed effectively and whether it prevented household financial distress during the Covid -19 pandemic. The paper concluded that an individual is 30% more likely to be behind on housing payments and 9% more likely to be behind on bill payments, compared to an individual not on leave.

Although the furlough scheme is effective in preventing mass unemployment and preserving employer-employee relationships, furlough-induced adjustments in household savings potentially increase wealth inequality when workers leave furlough with lower savings. to that of persons not placed on leave. Moreover, the increase in financial distress during furlough is concentrated among workers earning low incomes before the pandemic and having a low level of education.

From March 2020, the government pays 80% of salaries up to a maximum of £2,500. These contributions have been gradually reduced recently until the end of the Coronavirus Job Retention Scheme in September 2021.

The article points out that while furloughed people saw their spending drastically reduced, they spent their savings to offset furlough-induced reductions in income, which in turn created new wealth inequalities. These changes in spending patterns persisted even after the leave period ended and the person returned to regular employment.

This is important as 24% of the UK workforce have been made redundant at least once as governments around the world have introduced short-term work (furlough) schemes to mitigate the economic damage of COVID -19 aimed at protecting jobs and incomes by allowing employers who are being hit hard by the pandemic to furlough workers rather than lay them off.

During a period of furlough, the government pays part of a worker’s salary up to a maximum amount, and while in some countries employers have the discretion to pay the remaining salary, many choose not to. Although furlough schemes have been effective in preventing mass unemployment, reduced income during a furlough period can mean significant financial hardship for many households. At the same time, furlough schemes place heavy burdens on public finances. It is therefore crucial that they are effective in preventing widespread household failure while remaining financially viable. The article finds that the 80% government contribution to the wages of furloughed workers minimizes the incidence of household financial distress at the least cost to taxpayers.

Dr Christoph Gortz, co-author and Associate Professor of Macroeconomics at the University of Birmingham, says: “The UK coronavirus retention program ends in September 2021. As the pandemic is not yet over, it is important to take stock and learn lessons about the effects and effectiveness of this policy. Although being furloughed means financial hardship and cutbacks for many families, on average we find that the UK furlough scheme is well designed in that the government’s contribution to the wages of furloughed workers minimizes the incidence of financial distress at the lowest cost to taxpayers.

Professor Danny McGowan, another co-author of the study, says: “Although furlough was certainly a distressing experience for some people, the overall effect on the number of households in financial difficulty due to the maintenance program in the use of the coronavirus was low.”

While the furlough scheme was originally set to last until June 30, 2020, the government made it clear from the outset that it could be extended should the pandemic continue. After several extensions, from June 10, 2021, the partial unemployment scheme was effectively closed to employees who had not been previously made redundant.

The government has reduced its contribution to 70% and employers have been mandated to contribute at least 10% of a worker’s monthly salary from July 1, 2021. From August 1, 2021, the government has further reduced its contribution to 60 %, with employers paying at least 20% of the monthly salary of workers on leave9. From July 1, 2021, employers must pay national insurance and pension contributions that were previously paid by the government.

The sample period runs from April 2020 to April 2021. It therefore covers almost the entire period during which employees might be newly enrolled to participate in the furlough scheme, but it does not include the period of reduction in government contributions.

The link to the article titled Furlough and Household Financial Distress during the COVID-19 Pandemic.

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Sarah J. Greer