Will the end of furlough help solve the supply chain crisis?

The UK’s furlough scheme has come to an end almost 18 months after it was launched in April last year. Now, we could be facing a rash of redundancies.

An increase in the number of available workers could work out well to help ease some of the hiring and supply chain problems the country has been desperately struggling with recently. However, there’s still likely to be a mismatch of skills and experience between those leaving furlough and the vacancies available. So it might not prove to be a hard and fast solution to the labour supply crunch.

In this article we take a close look at the potential impact of ending the scheme and how it might be relevant to investors.

This article isn’t personal advice. If you're not sure an investment is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

What was furlough?

In March last year, it became clear the UK would need to take drastic measures to combat the pandemic and looming jobs crisis, as industries across the board saw demand drop. Two of the most important policies have been the Coronavirus Job Retention Scheme (CJRS) and Self-Employed Income Support Scheme. Together, we’ve called them ‘furlough’.

The idea was simple. The pandemic and our response would temporarily prevent lots of businesses and self-employed people from trading. Without any support, a number of businesses would go bust or make staff redundant.

Mass job losses or corporate bankruptcies would’ve dissolved productive teams and organisations, which would’ve made the eventual economic recovery that much harder. What’s more, many people would’ve lost their incomes, leading to even more widespread financial hardship at an already challenging time.

To avoid this, the government decided to support workers and businesses with the furlough scheme. Originally, the government paid 80% of a furloughed employee’s salary up to a cap of £2,500 per month. Employers only had to make National Insurance and pension contributions from August 2020 onwards.

As waves of the pandemic crashed over the economy, the scheme kept being extended. However, the government’s contribution was cut from 80% to 60% between July and August this year as the scheme wound down. A similar scheme was set up for the self-employed, but not for the small business owners who were paid as company directors.

Who was on furlough by the end?

Source: ONS, 23/09/21

The Business Insights and Conditions Survey (BICS) suggests around 6% of the workforce was fully or partially furloughed at the end of August, give or take a percentage point either side. This represents between 1.3m and 1.7m people, of which 0.3m to 0.8m were fully furloughed.

But that 6% or so weren’t spread evenly across the sectors. Almost 10% of people working in the arts, entertainment and recreation sectors were on furlough, and 16% of the people working in “other service activities” which includes hairdressers and beauty salons. At the other end of the scale, only 2% of water supply and sewage management workers were on any sort of furlough.

But now the scheme is over, the worry is that lots of these people will lose their jobs or have their hours slashed.

Research suggests older and younger workers are more likely to be on furlough than their middle-working aged colleagues. This could be especially worrying as older people tend to stay unemployed for longer than younger people when they lose their jobs.

Won’t that help with the lorry driver shortage?

As you might have noticed, holes are starting to appear on supermarket shelves thanks to problems with supply lines and logistics. You certainly can’t have missed the queues which built up around petrol stations, amid concerns about supply. There are several reasons for the disruption, but a big part of the problem is a shortage of lorry drivers. So, you might be hoping some of those without a job after furlough could help out.

We recently spoke to lorry driver Tom Reddy, on our Switch Your Money On podcast, who said that the industry had traditionally relied upon overseas drivers. Many of these workers have left the country since Brexit, leaving over 100,000 driving positions unfilled.

Unfortunately, it looks unlikely that people furloughed will be able to help here. Lorry driving is skilled work that requires an expensive licence. We don’t currently have the training and testing capacity to rapidly increase the pool of qualified drivers. This means the driver shortage probably won’t be solved by the end of furlough.

And a lack of lorry drivers isn’t the only problem. Many of the issues are global, such as a worldwide computer chip shortage and soaring energy and raw material costs.

So, will this increase unemployment?

Unfortunately, it probably will – at least in the short term.

Even though some sectors are struggling to find enough staff at the moment, it will take time for people to retrain or even move to places with a stronger job market. This means unemployment is likely to rise, but this will hopefully be temporary.

Source: ONS, 14/09/21.

The average independent forecast collected by the Treasury was for 5.2% unemployment in the last three months of 2021. The Office of Budgetary Responsibility is more pessimistic and expects 6.5%. If either forecast came true, it would represent a jump from the 4.6% unemployment last recorded by the ONS.

What does this mean for investors?

As long as it’s temporary, rising unemployment shouldn’t be a cause for concern for investors. The furlough scheme has done a lot to keep household finances in reasonable order during the pandemic, but it could never go on forever. And some furloughed jobs were just never coming back.

Part of an economic recovery means adjusting to a new normal. That will mean working through temporary frictions and frustrations, including some unemployment until sufficient re-skilling and re-deployment feeds through the economy. In the short term, there are signs that some industries, like logistics and food production, will be more adversely affected by the current labour crunch than others.

The most recent forecasts from the Bank of England showed that although growth is slowing, overall output is still growing back towards pre-pandemic levels. So, as long as the overall economic trend is positive, investors shouldn’t worry too much. But it’s another reminder to stay properly diversified to be prepared for any bad weather ahead.

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