Don't expect a job-rich recovery after this crisis

1 July 2020: Sunday Times Economics Editor David Smith looks at historical unemployment and the risks from coronavirus in an exclusive monthly column for the ICAEW Financial Services Faculty.

It is a long time since we have had a genuine unemployment crisis but there is a danger of one now. The unemployment rate in America has surged to 14.7%, from 3.5% as recently as February, and is predicted to rise to more than 25% over the summer. 

Across Europe, countries which had just got to grips with their youth unemployment problem are facing another jobless surge. The Spanish government expects nearly a fifth of all workers to be unemployed this year. 

In Britain, where the unemployment rate was just under 4% when the crisis hit, people had been wondering what would happen to shake the labour market out of the extraordinary run that had taken the unemployment rate down to its lowest level in more than 45 years. 

Now we know. In April, the claimant count rose by more than 850,000 to 2.1m in April, while the wider unemployment rate is set to rise to 10% or more, implying an unemployment total of over 3.5m. 

The government has been doing its best to keep unemployment down with its job retention scheme which covers 80% of the salaries of furloughed workers up to £2,500 a month. It will run in its present form until the end of July and then, with employers contributing a quarter of wages and employees allowed to return to work, until the end of October. By then the scheme, and its equivalent for self-employed people, will have cost more than £100bn. 

It is a massive intervention, covering 10m people, but will not prevent a big jump in unemployment. 

What does recent experience of unemployment tell us and is that experience relevant for this situation? The last time unemployment spiked higher was during the global financial crisis. 

In America the unemployment rate rose to 10% in 2010, while in the eurozone the peak was a little later, in 2012 and 2013, during the intense phase of its crisis. In Britain, against expectations of an unemployment rate well into double figures and a level of 4m or 5m, the rate peaked at 8.5% in 2011, a total of 2.7m people out of work. 

Perhaps most surprising, in all these cases, was that the period of high unemployment was not enduring. During the recession (two recessions in the case of the eurozone), unemployment did not rise as much as feared, implying that businesses were “hoarding” workers. 

But then there was a second surprise, the hoarding story should have implied very little job growth during the recovery phase because the slack could be taken up within firms by the existing workforce. But there was such a recovery, albeit one that was accompanied by stagnant productivity. From 2010 until earlier this year, Britain’s private sector added more than 3.5m net new jobs. 

What about this time? On the face of it, recessions caused by lockdowns that are imposed for health reasons should be quicker and easier to recover from than an event like the global financial crisis, which left the banking system impaired for years. 

Unfortunately, it is unlikely to turn out that way, for three reasons. The first is the extent of the dive into recession we are seeing, unprecedented in the modern era. The resulting rise in unemployment, as we are already seeing in some countries, also exceeds anything in its speed and scope we have seen for many decades. 

Secondly, the re-opening of economies will be a slow process, partly because that is the aim of governments, but also because employees and customers will take time to return, and because businesses are having to put in place extensive safety procedures. 

That means social distancing, for months if not years, and a smaller number of employees returning to work. Economies will recover as lockdowns ease, but jobs will take much longer. 

Aggravating this will be a third element, the fact that some sectors, like pubs, cafes, hotels and the entertainment sector, which have been important sources of employment growth in recent years, will find it hardest to come back in the new world that we are entering. 

It is in these sectors where most businesses are expected to fail. It is why most employment experts fear a “job-poor” recovery from this recession and expect governments to have to use job support schemes, particularly aimed at the young. 

Is there a silver lining? The price we had to pay for an employment recovery after the global financial crisis was stagnant productivity. This time we may see productivity recover. 

But rising productivity against the backdrop of high unemployment is not a good look. We need rising productivity alongside low unemployment, and that remains a huge challenge.