Abstract
The COVID‐19 pandemic is having a dramatic economic impact in most countries. In the UK, it has led to sharp falls in labour demand in many sectors of the economy and to initial acute labour shortages in other sectors. Much more than in a typical downturn, the current crisis is not simply a general slowdown in economic activity but also a radical short‐term shift in the mix of economic activities – of which an unknown, but possibly significant, amount will be persistent. The initial policy response has focused on cushioning the blow to families’ finances and allowing the majority of workers and firms to resume their original activities once the crisis subsides. These are crucial priorities. But there should also be a focus on reallocating some workers, either temporarily if working in shut‐down sectors or permanently by facilitating transitions to sectors and jobs offering better prospects and facing labour shortages. The phasing‐out of the furlough subsidies, which is projected to happen in Autumn 2020, brings this into even sharper focus since the alternative for many workers will be unemployment. Active labour market policy will need to be front and centre.
Highlights
Fiscal Studies temporarily if working in shut-down sectors or permanently by facilitating transitions to sectors and jobs offering better prospects and facing labour shortages
The public health response to COVID-19 has led to sharp falls in labour demand in many sectors of economic activity in the UK
The role of Coronavirus Job Retention Scheme (CJRS) in protecting the incomes of families – and through that in preventing an even larger demand shock than that created by the requirements of social distancing, with consumers staying at home – is made especially important by the large cuts to the welfare system that have happened over the last decade
Summary
The initial policy response focused heavily on preventing employment ties from being severed in struggling sectors (essentially, encouraging what economists call ‘labour hoarding’) and protecting the incomes of those workers. The role of CJRS in protecting the incomes of families – and through that in preventing an even larger demand shock than that created by the requirements of social distancing, with consumers staying at home – is made especially important by the large cuts to the welfare system that have happened over the last decade.6 This approach was fairly well designed as an attempt to preserve the ‘matching capital’ described above, allowing workers to resume working in their original job once the crisis has passed. The subsidy of part-time work for existing matches is similar to the short-time subsidies that have long been a key labour market policy in some other countries8 – for example, France, Italy and Germany – and that have been credited for the resilience of labour markets to the worst economic shocks in these countries These reforms will likely be sufficiently mild to preserve many jobs of furloughed workers and keep many firms afloat in the short term. Other studies have shown that it is low-skilled workers who have been most at risk of losing their jobs either temporarily or permanently. Government intervention is likely to be warranted
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