One year on: we averted a jobs catastrophe, now we need to secure the recovery

Blog posts

22 Mar 2021

Tony Wilson

Tony Wilson, Institute Director

In a long read to mark one year since the start of the national lockdown, IES Director Tony Wilson offers his reflections on three big stories in the labour market and what we can learn from these for the recovery.

What’s your abiding memory from a year ago?  For me it was in our offices, the few of us who had gone in on that last Friday afternoon, hearing the Chancellor announce the Job Retention Scheme – the biggest intervention in the labour market in our lifetimes.  At that point the enormity of what was about to happen really sunk in, what had seemed at the same time both inevitable and yet inconceivable for most of that long week: that we were surely now about to enter a national lockdown.  I remember thinking that this would be the last time for a while that I would clear my desk and walk home.  I had no idea, of course, that it would be the last time that I would do so for a year.

Clearly, this last year has changed our lives in ways that few of us would have anticipated; and the coming years will be shaped by how we deal with and recover from the pandemic.  The same applies for our working lives too, where past recessions show us that the employment impacts are felt over years rather than months.  So a year on from that week, these are my reflections on what we have learnt and what this may mean for the recovery.  For me, three big stories stand out.

1. The good news first – we averted an unemployment catastrophe

Without doubt, this year has seen the biggest labour market shock in a generation.  By the end of 2020, payrolled employment had fallen by nearly 800 thousand (at 3%, the biggest annual fall since the 1990s recession); self-employment was down by half a million; and a further 2.3 million people were in work but fully furloughed, with their wages being met by the state.  However the economic shock has been the biggest not in a generation but in three hundred years, with output falling by 10% during 2020.  Had the labour market followed a similar path, then unemployment would already be well above four million.

Of course in the early stages of this crisis, many of us feared that this was exactly where things were headed: the first two weeks of the crisis saw nearly a million people make claims for Universal Credit, while figures released in May suggested that ‘claimant’ unemployment – usually a leading indicator for rises in the official measure – had already passed two million. In those early months it was far from clear whether we were in the middle of an unemployment crisis, or merely on the eve of one when the economic support measures would eventually be withdrawn – something that I tried to make sense of in a blog in June (with the Resolution Foundation doing a far more thorough job in a paper published the following month). Either way though, things were looking very, very grim, with the Office for Budget Responsibility stating in July that in their ‘central scenario’ unemployment would peak at 12% (above 4 million) by the end of the year.

The fact that this has not happened – and that we instead saw unemployment creep up to 5.1% – is thanks almost entirely to the announcement of the Job Retention Scheme on that Friday afternoon in March.  This was a bold, inventive and entirely necessary measure, surely the government’s single most important economic intervention during this crisis.  It was not perfect – in many ways its design served to highlight the gaps in our safety net; while we’re now starting to see the first of what will be many stories of firms that appear to have profited from the scheme.  But it did its job: at its peak nearly one third of all employees were having their wages paid by the Scheme; and as it has been extended and reformed, in particular to allow short-time working as well as full furlough, the risks of its withdrawal leading to an avalanche of unemployment have all but disappeared.  By the eve of the second lockdown, the number of people on ‘full furlough’ had fallen from a peak of 8.9 million to 1.3 million, and I fully expect that by the time of its eventual withdrawal in October that figure will be in the hundreds of thousands (if, of course, we can stay on the roadmap out of lockdown).

Fast forward to last month’s Budget and the latest official forecasts are that unemployment will now peak at 6.5%, or around 2.2 million.  I suspect that even this is somewhat pessimistic (again if we can stay on the roadmap…) but either way we are on track for unemployment in this crisis to peak lower than it did in the last, and to peak lower in fact than in any recession since the mid-1970s.

2. But ‘could have been worse’ is as good as it gets: we’re facing three big challenges

However, while it’s clear now that we have averted an unemployment crisis, I fear that we could be walking into three more.

First, there are clear signs that this crisis risks widening inequalities in the labour market.  Young people in particular have been hit hard – from being at the wrong end of job losses and weak hiring as happens in every downturn; but exacerbated in this one because of its specific impact on high-employment sectors like hospitality, retail and care, and by the sheer bad luck of lockdowns hitting when youth hiring tends to be strongest – in the run-ups to summer and to Christmas.  These risks were clear a year ago too, and in fact it was in the week before full lockdown that Impetus, Princes Trust, Youth Employment UK, Youth Futures Foundation and ourselves set up the Youth Employment Group – which now has over 200 members committed to working to support youth employment and participation (you can sign up here).   Since then, young people have accounted for three fifths of the total fall in employment despite only being around one eighth of those in work.  Of more concern, our analysis has suggested that these impacts have not been felt equally – young people from ethnic minority groups appear to be particularly hard hit, with employment falling four times faster for Black young people and nearly three times faster for Asian young people.

Young people are not alone in losing out in this crisis.  For example a range of evidence has shown that mothers have seen far larger impacts on their employment and hours than fathers or those without children, while our work with Gingerbread found that single parents in particular have lost out.  On disability, there are signs that the employment rate ‘gap’ with non-disabled people stopped narrowing during the pandemic (and stands at an unacceptably wide 29 percentage points). Looking at local impacts, this crisis has hit everywhere hard but the areas that have fared worst on both (high) rates of benefit claims and (low) rates of vacancies are the areas that were faring worst pre-crisis – namely ex-industrial areas, inner cities and coastal towns.

Secondly, long-term unemployment will at least double over the next year.  Based on the path of long-term unemployment after previous recessions, if unemployment peaks at around 6% this year we can expect long-term unemployment to rise from around 300 thousand on the eve of the crisis to at least 700 thousand during 2022 (or 900 thousand if you include young people unemployed for six months or more).  Current estimates are affected by measurement issues in the Labour Force Survey, but nonetheless suggest that it is on the rise and may already approaching 400 thousand (once again, with young people faring worst).  Addressing this needs to be a top priority – not just because of the lasting ‘scars’ that can follow from a prolonged period out of work, but because high long-term unemployment will hold back our recovery and could lead to permanently higher worklessness.

How fast long-term unemployment rises largely depends on the scale of the initial crisis, but how high it gets – and when it peaks – depends on the speed of the recovery.  In the last recession, a weak recovery alongside cuts in support saw long-term unemployment peak in 2013, nearly five years after it had started to rise.  This time round there are specific reasons to be fearful, in that many of those who left work in the last year will have had very little chance or support to get back into work.  And while the planned, £2.9 billion Restart programme is welcome – and has the potential to significantly improve on the Work Programme which ran during the last downturn – it will also take time to get going, with demand likely to outstrip supply until at least spring of next year.

Finally, there is every risk that if we don’t see a significant impact on unemployment over the coming year, we’ll instead see ones on under-employment, working hours and pay.  Worryingly, there are already some early signs that these risks are starting to materialise – with the number of people in temporary work because they can’t find a permanent job increasing, a large rise in the number on fixed term contracts, and more people saying that they want more hours than they have currently got.  All of this feels worryingly like the challenges that we faced – and largely failed to address – in the years after the last recession too. 

3. Bold action made a difference in those early months – it can do so for the recovery as well

Looking back over the last year, our labour market (and wider economic) response can be thought of in three parts: rescue, repair and now recovery.  The rescue stage saw the rollout of the Job Retention Scheme and financial aid to firms affected by the shutdowns, in a decisive break with how we have dealt with crises in the past.

The repair job began with the Plan for Jobs and continued through the autumn Spending Review, and was far more in keeping with what has gone before – a doubling of ‘work coach’ employment advisers, investment in back-to-work services, a huge new programme for the long-term unemployed (Restart), subsidised job creation for young people (Kickstart) and so on.  However, what’s gone before is also what’s worked – and while there were gaps (most notably around skills support), the speed and scale of the government’s response was welcome, with nearly £7 billion committed to new active labour market measures.

However, as we look towards the recovery, some of the gaps in our response so far start to widen, and new ones are beginning to appear.

On support for those further from work, a weaker labour market plus more competition for jobs means that we need to do more – not the same, nor less – to prevent inequalities from widening.  However to give just a couple of examples, despite the near £7 billion committed for active labour market measures, we’ve seen no new investment in specialist support for disabled people, nor to support higher participation for single parents, nor to improve outcomes for those from ethnic minority groups.  We need to do more in each of these areas, starting with the promised green paper on disability employment later this year. 

We also need a far greater focus on how we can make work better, particularly for those in low paid or insecure work.  We entered this crisis with around six million people in low pay and nearly four million in insecure work.  The recent Uber judgement has highlighted that our employment laws are no longer fit for purpose, while our work with the CIPD on enforcement has shown that we are falling far behind in how we work with employers to promote good practice as well as compliance.  All of these were issues highlighted nearly four years ago in the Taylor review, and were recurring themes in our research with low paid workers in the early stages of the pandemic too.  Yet we still wait for news on whether the promised Employment Bill will appear this year (or even at all).

After a decade of stagnant wages and flatlining productivity (outside of London at least) we need a new approach, and it needs to go far wider than just reforming our laws and our regulators.  Our Progression in Employment programme sets out how in order to address low pay and make work better and more productive we need to improve the quality of management, workforce strategy, job design, skills investment and more.  This has arguably become even more important during this crisis and affects nearly all of us, where our research on the impacts of homeworking for example has shown that those who reported having more control over their work and hours, a better relationship with their manager and higher job satisfaction, also had better mental and physical health during the pandemic.

In our Laid Low report in January, we set out how in order to make work better we need to take action in a number of linked areas: including by trialling new, local Good Work Partnerships that can bring together industry, government and social partners and are focused on supporting firms to create and support decent work; accompanying this with new investment in workplace skills support (not just in full Apprenticeships and off-the-job Level 3 qualifications); strengthening our social security system and reforming and increasing Statutory Sick Pay; and creating a properly equipped and proactive Single Enforcement Body for labour market regulation.

Finally, and perhaps most importantly, we need to do more to give hiring a hand.  We’ve called before for government to reduce the National Insurance bill for employers, but at each ‘fiscal event’ the Treasury has found good reasons not to act – an impending recovery in the summer, a looming lockdown in the autumn, an impending recovery again now.  However, the case for action is in my view stronger.  It won’t be enough to get hiring back towards where it was before this crisis: if we want to repair the damage done to the labour market, and for those out of work, we need hiring to get well above where it was a year ago.  And while we can expect a strong recovery if we can stay on the roadmap out of lockdown, much of this may be short term and many of the same factors that held back hiring last year will hold it back this year too: huge spare capacity as the furlough scheme unwinds; continued economic uncertainty (in particular from post-Brexit trade disruption); and hundreds of thousands of struggling small businesses, often supporting local economies.

This may be a long road back – but perhaps not to where we were

So the unemployment crisis could have been far worse; but the coming years bring with them real risks of rising long term unemployment, under-employment, widening inequalities and work insecurity.  In my view we need to be as bold and ambitious in addressing these challenges as we were in those first few months of the crisis a year ago.  However, our ambition shouldn’t be to get back to where we were at the turn of last year – it should be for an economy and society where everyone can access good quality, secure and meaningful work with a decent wage.

We have an opportunity now, perhaps the best chance we’ve had in decades, to try to achieve that.  I wonder if when I look back at these times in a decade or more, whether it will still be those very early days that stick most in my mind.  My hope is that it won’t, and that instead I’ll remember how we seized the opportunity, in the years that followed, to make things better.

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Any views expressed are those of the authors and not necessarily those of the Institute as a whole.