Abstract
We study how furlough affects household financial distress during the COVID-19 pandemic. Furlough increases the probability of late housing and bill payments by 30% and 9%, respectively. The effects exist for individuals who rent their home, but not mortgagees who can mitigate financial distress by reducing expenditure during furlough by deferring mortgage payments though the Mortgage Holiday Scheme. Furloughed individuals significantly reduce expenditure and spend their savings to offset furlough-induced income reductions. This creates wealth inequality but lowers the probability a furloughed worker experiences financial distress after returning to work. Estimates show an 80% government contribution to furloughed workers' wages minimizes the incidence of financial distress at the lowest cost to taxpayers.
Highlights
Governments across the world have introduced Short-Time-Work schemes to mitigate the economic damage of COVID-19
An individual is 30% more likely to be late on housing payments and 9% more likely to be late on bill payments, relative to a non-furloughed individual
We find that after a furlough spell ends, an individual is significantly less likely to be late on bill payments
Summary
Governments across the world have introduced Short-Time-Work (furlough) schemes to mitigate the economic damage of COVID-19. The policy attempts to safeguard jobs and incomes by allowing employers that are adversely affected by the pandemic to place workers on temporary leave rather than make them redundant. The government pays part of a worker’s wages up to a maximum amount, and while in some countries employers have discretion to pay the remaining salary, many choose not to. Furlough schemes have been effective in preventing mass unemployment, the reduction in income during a furlough spell can imply substantial financial difficulties for many households. Furlough schemes place heavy burdens on public finances. It is crucial that they are effective in preventing widespread household default while remaining financially sustainable
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