COVID-19 and the labour market

By Ian Brinkley, former chief economist, CIPD 

There is no doubt that unemployment will rise a lot and employment will fall due to COVID-19The extent will not be known for some months, until the employment statistics catch up, though some business activity surveys confirm a rapid decline and applications for universal credit have soared 

One speculative article has suggested unemployment could reach 20%,1 but a report suggests that net job losses in the first year will be limited to 200,000In the US less than helpful back of an envelope estimate is that the unemployment rate could peak at anywhere between 11 and 40% in the second quarter.  

The latest labour market statistics, published before the virus struck, confirm that the labour market is good at producing large numbers of jobs quite rapidly. In the last recession, the UK’s flexible labour market saw living standards rather than employment take much of the strain, with employment falling much less than the drop in GDP. Expectations of a short-lived decline mean more firms than usual will be reluctant to let workers go if they think they would be hard to replace in the recovery.  

Homeworking and subsidies  

I speculate that one of the few permanent legacies of the crisis will be an increase in working from home and an acceleration in the shift to online economic activity. The ability of people to work from home is greater than in the past, as the CIPD’s recent Megatrends report Working from home: what’s driving the rise in remote working? highlights. The COVID-19 crisis has forced employers to consider inventive ways for their workforce to operate remotely. It will be some months before we know how successful these efforts have been. But, the UK already had a high rate of occasional working from home by EU standards, and UK surveys suggest that a much higher share of homeworking is possible.   

A further major difference from previous recessions in the UK is the Government’s subsidy schemes for wages and income support for the self-employed. These are not yet open, so we cannot say what the take-up will be. However, last month in Germany at least half a million firms applied for support from the long-established short-term government work programme and these schemes have a proven track record in mitigating job lossMoreover, workers on the scheme will be able to restart very rapidly once conditions revivegreatly reducing the normal time required to hire and recruit. 

Impact on employment 

Even so, the short-term impact will be severe. Some 2.5 million people work in hospitality and accommodation services and another million in arts, entertainment and leisure services. Wholesale, retail and garages employ nearly 5 million people, and while food stores and some wholesalers will sustain employment, many other businesses will be badly impacted. These sectors also include large shares of small and relatively new businesses, who have much less resource to get through bad times than larger firms. 

Although we lack timely statistics for the UK, in the US labour market data is released monthly, and we have some indications from that how things will start to play out in the UK. The US unemployment rate jumped from 3.5% to 4.4% in March compared with the previous month, but a large share were workers who said that they were on temporary lay-off and expected to be recalled.  So far, the rise in those reporting permanent job loss has been relatively modest.  

Overall US job losses in March were 700,000, or 0.5% of all employees. Nearly two-thirds were in the hospitality sector. The US figures also suggest that hours reductions are playing a significantly role, with a 45% rise to just over 4 million in those reporting fewer hours because of slack work or business conditions.  

These patterns are likely to be reflected in the UK labour market, though the published UK statistics do not allow us to distinguish temporary lay-offs or a slack work measure, as in the US figures.  

The situation will change, and more evidence will allow us to get a better grip on how the situation is evolving.  At present, speculative unemployment forecasts are, I fear, largely worthless. But for now, I remain cautiously optimistic that we will avoid the worst-case scenarios with a rapid labour market recovery once the COVID-19 crisis eventually abates. 

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