46 TheEconomistAugust 22nd 2020
1“I
’ve hadmembers of my association
claiming universal credit and they’re
shocked by how low it is,” says a Tory mp. It
is unusual for Conservative stalwarts to see
the benefits system at close quarters: al-
most three decades of mostly low unem-
ployment have reserved it for the unfortu-
nate few. But as the furlough scheme winds
down and the deepest recession for a cen-
tury hits employment, the system’s weak-
nesses will gain new political salience.
The official unemployment rate, as of
the end of June, was just 3.9%—remarkably
low at any time, let alone when gdphad
dropped by more than a fifth. America’s
June figure was 11.1%. It has stayed low in
Britain because of the furlough scheme,
under which the government paid 80% of
the wages of employees.
Now the sticking plaster is being torn
off. The furlough scheme ends in October.
This month firms had to start contributing
to the cost of furloughed staff. Britain pro-
duces its unemployment figures with a
two-month lag, so nobody knows what thejobless rate is now; but huge redundancies
are being announced. On August 18th,
Marks & Spencer announced that it would
cut 7,000 jobs. Retail and hospitality are
likely to bear the brunt (see chart on next
page), but white-collar jobs are going too:
Accenture, a consultancy, is cutting 900
jobs—8% of its British workforce—because
of a drop in demand for its services. Several
law firms, including dwfand bclp,have
recently announced job cuts.
The Bank of England expects unem-
ployment to peak at 7.5%; the Office for
Budget Responsibility, the fiscal watchdog,
is more pessimistic and has pencilled in a
peak of around 12% followed by a relatively
rapid fall. Given the scale of the hit to the
economy, those numbers are relatively
modest. This reflects a belief that, thanks
to deregulation in the 1980s and 1990s, the
British labour market is flexible.
Recent economic history appears to
support this view. In the recession of the
early 1980s, a 5% fall in output pushed up
the unemployment rate by around sevenpercentage points; in the early 1990s gdp
fell by closer to 2.5% and the unemploy-
ment rate rose by almost four percentage
points; in the recession of 2008-09, output
fell by just over 6% but the unemployment
rate rose by just three percentage points.
Policymakers are hoping for a similar ratio
this time, with the Bank of England expect-
ing gdpto be about 5% lower at the end of
2020 than before the crisis but with only a
three and a half percentage-point rise in
the unemployment rate.
Not everybody agrees. Paul Gregg, a for-
mer Treasury official now at the University
of Bath, reckons that the rise in unemploy-
ment during a recession is partly the result
of the degree of stress on companies, and
partly the result of its distribution by sec-
tor. In the early 1990s firms had piled on
debt and were suffering from the impact of
high interest-rates. In 2008-09 low inter-
est-rates and a weak exchange rate helped
to sustain profit margins and raised infla-
tion, pushing down real wages. This time
round, Brexit-related uncertainty had al-
ready squeezed corporate profitability, and
now demand—especially in labour-inten-
sive sectors with low productivity and pro-
fit margins—has collapsed. Mr Gregg’s
framework suggests that any fall in eco-
nomic output could push up unemploy-
ment by more than the drop in gdpand that
the bounce-back could take longer than
many policymakers expect.
Most European countries are support-UnemploymentIt’s coming
Britain is ill-prepared for the big rise in unemployment likely in the autumnBritain
47 Gymshark
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