Beware scaling back UK furlough scheme too soon

lorry drivers

The strength of the UK jobs market and rates of pay has been overstated, according to new research, just as the government prepares to cut back its wage support scheme for furloughed workers this week.

There is a risk of “dangerous complacency”, the Resolution Foundation warned, as people are still working fewer hours than they were before the pandemic and headline pay growth is overstated.

Total hours worked in the UK economy are still about 7% below pre-crisis levels, a fall comparable with the depths of recession, according to the thinktank’s analysis based on a poll of 8,000 workers. Underlying annual pay growth remains slower than before the pandemic hit Europe, it added.

From Thursday, the government’s coronavirus job retention scheme will be scaled back. Employers will have to pay 10% of wages for furloughed workers, with the government paying employers another 70% of wages up to a maximum cap. Up to now the government has paid 80% of wages, with no mandatory contribution from employers. Furlough is planned to end completely on 30 September. The latest available data showed that 3.4m people were still on furlough at the end of April.

Bosses in some sectors – notably in hospitality venues such as restaurants and pubs – have complained of labour shortages as they reopen. Evidence of hiring difficulties has prompted hopes of pay rises for workers, while economists around the world are on the lookout for early signs of inflation.

However, the foundation, which researches on living standards, said the data suggests the UK labour market is “lukewarm” rather than overheating, and that it was “nonsense” to portray a tight UK labour market.

The average pay growth over the last two years is running at only 2.2%, the foundation said, compared with official data which shows pay growing at double the speed. Official measures of pay growth – which showed booming 5.6% year-on-year pay growth in the three months to April – have been overstated because of the comparison with the first lockdown, in which large parts of the economy ground to a halt.

Data from Incomes Data Research, a pay research organisation, showed that the median pay rise in the three months to May was only 2%, based on analysis of pay settlements for 1.3m workers. That compares with a current inflation rate of 2.1%, above the Bank of England’s 2% target.

“The UK economy is bouncing back rapidly after a deep and painful recession. It’s particularly welcome to see so many furloughed staff back working again,” said Gregory Thwaites, research director at the Resolution Foundation.

“But these encouraging signs risk breeding dangerous complacency, as people overplay the health of the labour market, and underplay the risks that still lie ahead.”

Kate Bell, the head of economics at the Trades Union Congress, cautioned that evidence of significant upward pressure on pay was still limited. She said that the tapering of the furlough scheme should be pushed back at least a month until restrictions on businesses are removed, including a total ban on nightclubs reopening until at least 19 July.

“Nobody really knows how fragile the current situation is,” Bell said. “There are a lot of workers in the hospitality sector still on furlough. We don’t know what is going to happen to those businesses and those workers.”

Bell said that the TUC’s affiliate unions had seen some evidence of worker shortages in specific jobs such as lorry drivers and care workers, but warned that these appeared to be “isolated pockets”.

“A recovering labour market is not the same as a recovered one,” said Thwaites. “Labour shortages in hospitality aren’t a huge problem, and there is no real evidence of a new pay boom. Instead these things are part of the bumpy ride that emerging from a pandemic inevitably involves.”