Unemployment in the United Kingdom

The impact of the COVID-19 pandemic on the euro area labour market

Prepared by Robert Anderton, Vasco Botelho, Agostino Consolo, António Dias da Silva, Claudia Foroni, Matthias Mohr and Lara Vivian

1 Introduction

• The euro area labour market has been severely hit by the coronavirus (COVID-19) pandemic and associated containment measures.
• Unemployment increased more slowly and to a lesser extent, reflecting the high take-up rate of job retention schemes and transitions into inactivity.
• The labour market adjustment occurred primarily via a strong decline in average hours worked.
• Both labour supply and aggregate demand shocks help explain the decline in total hours worked.
• [1] High-frequency indicators of labour demand and new hires help to shed light on the impact of the crisis on the labour market.
• That changed with the pandemic and associated lockdowns, during which more than a third of Europeans began to telework.

2 Developments in employment, unemployment and hours worked

• The COVID-19 pandemic led to the sharpest contraction on record in employment and total hours worked in the second quarter of 2020.
• Both employment and hours worked recovered somewhat in the third quarter, but remained substantially below their levels in the fourth quarter of 2019.
• Total hours worked changed substantially more than employment, and also more than GDP.
• In the second quarter of 2020, the quarter most affected by the containment measures, total hours worked declined by 16.8% and average hours worked declined by 14.3% in annual terms (see Chart 1).
• Box 1 describes the nature of the shocks affecting total hours worked and labour force participation.
• By contrast, labour productivity per hour increased by 2.6% year-on-year in the second quarter of 2020, as hours worked dropped more than GDP (see Chart 1).
• This dichotomy between productivity per person and per hour worked is more marked than in previous recessions and reflects the very high take-up rate of job retention schemes.
• The reaction of the unemployment rate to the fall in activity was more muted than the reactions of employment and total hours worked.
• Between February and October 2020, the unemployment rate in the euro area increased by only 1.2 percentage points to 8.4%, despite the large fall in employment.
• [2] The labour force recovered substantially in the third quarter, but remains smaller than in the fourth quarter of 2019.
• Chart 2 Unemployment rate and labour force participation rate in the euro area (left-hand scale: percentage points, quarter-on-quarter changes; right-hand scale: percentages)
• The unemployment rate and total hours worked moved away from their long-term co-movements with GDP in the second quarter of 2020.
• However, the unemployment rate has not increased relative to the second quarter of 2019, while total hours worked has decreased by more than would have been expected when looking at its long-term relationship with GDP.
• Chart 3 Predictions based on the long-term relationship between selected labour market aggregates and GDP (unemployment rate, percentage points; employment and hours worked, percentages)
• Box 1 Key drivers of labour market developments: an SVAR analysis Prepared by Claudia Foroni and Matthias Mohr This box assesses recent developments in total hours worked and the labour force in the euro area on the basis of a sign-restricted structural vector-autoregressive model (SVAR).
• These shocks are unobservable and are identified by imposing restrictions on the direction in which the endogenous variables move in response to the impact of the shocks, as shown in Table A.
• [4] Table A Restrictions imposed on the impact of shocks on endogenous variables
• Such a shock would, in this context, also increase the demand for labour, so total hours worked would increase.
• Chart A shows the cumulative effect of the identified shocks on the annual changes in total hours worked and the labour force up to the second quarter of 2020.
• [6] On the supply side, labour supply and productivity shocks together are estimated to account for more than one-third of the total decline in hours worked.
• The impact of a negative demand shock is estimated to account for about one-quarter of the decline in total hours worked in the second quarter.
• The residual component is estimated to account for less than one-third of the decline in total hours worked.
• Chart A Contributions of shocks to changes in total hours worked and the labour force in the euro area (annual percentage changes; percentage point contributions)
• Between February and April 2020 around 25 million jobs were lost and the unemployment rate increased from 3.5% to 14.7% (see Chart A), with workers that were temporarily laid off accounting for 75% of the new unemployed.
• [7] In the first six weeks of the shutdown around 30 million people applied for unemployment benefit, while 8 million workers left the labour force in March and April.
• [8] Chart A (percentages of civilian labour force, seasonally adjusted)
• One relevant aspect for understanding the increase in unemployment is its link to the decline in employment related to developments in labour force participation.
• Chart B shows that in past recessions the bulk of the increase in unemployment was related to the decline in employment.
• Hours worked per worker also showed a slightly more marked adjustment than in previous recessions (see Chart B).

3 Job retention schemes

• Job retention schemes reached unprecedented levels in the first months after the onset of the COVID-19 pandemic and thus play an important role in explaining labour market developments in this period.
• In the fourth quarter of 2020 the number of workers in job retention schemes is expected to increase in response to the new lockdown measures.
• To put these numbers into perspective, in 2009 the average share of employees participating in short-time work schemes reached 3.2% in Germany, 0.8% in France, 3.3% in Italy and 1.0% in Spain.
• [9] These schemes help to explain the adjustment in the labour market via average hours worked.
• Chart 4 Share of employees on job retention schemes (percentages of employees)
• The large number of workers on job retention schemes benefited from rapid policy responses to support the labour market during the early stages of the pandemic.
• Job retention schemes featured prominently and were widely adopted across the euro area.
• [10] Some countries introduced new short-time work schemes and others overhauled existing schemes by increasing their generosity, broadening eligibility and reducing the administrative burden of accessing the schemes.
• [11] Job retention schemes help to keep employment stable in the short term, but it is important to design them in a way that limits undesirable effects.
• [13] However, job retention schemes also entail some degree of deadweight losses (when they subsidise jobs that would not have been lost) and displacement effects (when they subsidise unviable jobs).
• In addition, some countries adjusted the generosity of their job retention schemes when extending their duration after the first months of the pandemic.
• The number of workers on job retention schemes, which has remained elevated since the start of the pandemic and peaked in the second quarter (see Chart 4 in the main text), played a decisive role in these developments, especially via the implications for hours worked per person.
• Such schemes tend to have a downward effect on compensation per employee, as employees usually retain their employment status but face pay cuts when enrolling in these schemes.
• The operation of government support measures complicates the assessment of underlying wage trends during the pandemic.
• First, information on how much of the aggregate compensation and how many of the employees are attributable to job retention schemes requires detailed data on wage replacement rates and take-up rates, which are published only with a considerable time lag.
• Second, the statistical recording can differ across countries.
• While in most large euro area countries the benefits provided under the support schemes are paid directly to employees and are recorded as social transfers, in the Netherlands, for example, employers receive a subsidy to finance their payments to employees.
• [18] This indicates that the decrease in the number of hours worked due to the COVID-19 crisis was not fully matched by a corresponding increase in firms costs, as in some cases firms received subsidies introduced by euro area governments to support job retention during the crisis.

4 Using high-frequency indicators to assess labour market developments

• High-frequency indicators are a useful tool for gaining a timely understanding of labour market developments, particularly in periods of rapid and drastic changes in economic activity.
• For example, Google Trends provides information about the interests of people using the Google search engine to search specific topics, such as job retention schemes and unemployment conditions.
• Two other sources that can be used as a more direct measure of demand conditions in the labour market are Indeed job postings and the LinkedIn hiring rate.
• These indicators are available well ahead of the publication of official labour market statistics and thus provide valuable timely information which can aid the early identification of changes in labour demand and job findings.
• This indicator provides daily information on the level of interest of users in the labour market situation.
• The hiring rate and job postings indicators provide further evidence of the strong impact of the pandemic on the labour market.
• The LinkedIn hiring rate indicator is more closely related to job-to-job transitions and the job-finding rate, while the Indeed job postings indicator reflects developments in labour demand and may be regarded as an indicator of vacancies.
• Both indicators declined sharply in March and April as the pandemic took hold and lockdown measures were implemented (see Chart 6).
• Chart 6 High-frequency labour market indicators: hiring rate and job postings (year-on-year growth rates, percentages)

5 The impact of the crisis across countries, activity sectors, demographic groups and types of job

• This section analyses differences in the impact of the pandemic across euro area countries and across activity sectors, as some sectors are more exposed to changes in demand patterns than others.
• It also analyses the impact of the pandemic across demographic groups and types of employment contract.
• In addition, the section discusses the adoption of teleworking during the pandemic and the potential for its further use.
• The impact of the COVID-19 pandemic on the labour market is very negative and widespread across euro area countries.
• Total hours worked declined in all main sectors in the euro area in the second quarter of 2020.
• The extent of the decline was different across sectors, partly reflecting the strictness of the lockdown measures affecting each sector.
• While job retention schemes have helped to stabilise employment, such policies may also hinder the efficient reallocation of workers across sectors.
• Chart 8 Total hours worked and total employment in the euro area across sectors (quarter-on-quarter rates of change, percentages)
• The decline in employment was strongest for temporary employees, the young and workers with low levels of education.
• Likewise, young workers were disproportionately affected when compared to older workers.
• Across contract types, employment decreased most for temporary employees (see Chart 9, panel b).
• In line with the fall in employment, the youth unemployment rate increased significantly more than the overall unemployment rate (see Chart 9, panel c).
• The COVID-19 crisis and related policies have resulted in the more widespread adoption of teleworking.
• More than a third of workers in Europe began to telework as a result of the pandemic.
• [24] This is likely to have supported employment and hours worked in some sectors and for some workers, in particular those with a high level of education.
• Box 4 Teleworkable jobs Prepared by Colm Bates and Lara Vivian This box analyses teleworking patterns in the EU and the United Kingdom.
• In the euro area, the share of teleworkable jobs is highest in the information and communication sector and lowest in agriculture.
• [26] Chart A Share of annual earnings and employees in potentially teleworkable jobs in the euro area by sector (percentages)
• Similarly, the share of workers who work from home either regularly or occasionally varies substantially across regions.
• As many as 70% of potential teleworkers report working from home in Stockholm, while this share is around 45% in Paris and London.
• On the other hand, less than 10% of potential teleworkers engage in remote working in Italy.
• [27] Figure A Share of potential teleworkers who work from home at least sometimes across EU regions

6 Concluding remarks

Background

• Cuts to social security budgets over the last decade is causing widespread poverty and hardship.
• Universal Credit needs urgent investment to catch up and provide claimants with adequate income.
• The temporary increase in the standard allowance in response to the Covid-19 pandemic shows that the previous level of awards was too low.
• The Government is using Universal Credit to recover debt, mostly 6 billion of historic tax credit debt.
• Deductions of up to 30% of the standard allowance, and in some cases more, can be taken from claimants.
• There should be a mechanism to enable claimants to have an early reassessment if their circumstances change.

Chair's comments

• It has led to an unprecedented number of people relying on foodbanks and not being able to pay their rent.
• "The mechanics of Universal Credit do not reflect the reality of peoples lives.
• "Universal Credit needs more money to catch up after 10 years of cuts to the social security budget.
• "The five-week wait for a first payment must be replaced by a non-repayable two-week grant to all claimants.
• The monthly payment calculations which can result in big fluctuations to claimants incomes should be fixed for three months.
• It has led to an unprecedented number of people relying on foodbanks and not being able to pay their rent.
• The monthly payment calculations which can result in big fluctuations to claimants incomes should be fixed for three months.

Other findings

• The Committee’s other key findings and recommendations include:
  • The Government must prioritise helping people into work, particularly with the increase in unemployment that the Covid-19 pandemic is causing. All claimants should have a work allowance, at a higher rate than now, to allow them to keep more of their award as they move into work.
  • The Government should consider reducing the taper rate to ensure that the poorest in society do not pay higher marginal effective tax rates compared to the richest in society.
  • The conditionality requirements on claimants who can look for, or prepare for work, has been increased significantly over recent years. Less emphasis should be placed on obligations and sanctions. Instead, there should be more support to help coach and train claimants to find jobs or to progress in their current roles. Conditionality should be adapted to accommodate changing labour market conditions, including at the local level, particularly in the light of the economic impact of the Covid-19 pandemic.
  • The UK has some of the most punitive sanctions in the world, but there is limited evidence that they have a positive effect. Removing people's main source of support for extended periods risks pushing them further into poverty, indebtedness and reliance on food banks. There is a substantial body of evidence which shows that sanctions harm people’s mental health. The Government should evaluate the current length and level of sanctions. It should also expedite its work on introducing a written warning system before the application of a sanction. Sanctions must be a last resort.
  • The Government is doubling the number of work coaches in response to potential levels of high unemployment. This may not be enough to support people to find work in a stagnant labour market with high levels of competition for jobs. A cap should be introduced on the number of cases for which each work coach can be responsible.
  • Paying awards on a monthly basis does not reflect the way many claimants live. It causes unnecessary budget and cash flow problems. All claimants should be able to choose whether to have Universal Credit paid monthly or twice monthly.
  • Including childcare support in Universal Credit was a mistake. Paying costs in arrears has been a barrier to in-work progression and in some cases, it has been a disincentive to work. The Government should remove childcare support from Universal Credit and be made into a new standalone benefit paid in advance.

Further information

• The Universal Credit assessment period runs from the last day of each month to the penultimate day of the following month.
• Yesterday, the Court of Appeal dismissed the Department of Work and Pensions' (DWP)attempt to overturnthe High Court's ruling, with Lord Justice Underhill saying that the issue has had a "severely harmful impact".
• Parliamentary Under-Secretary of State for Work and Pensions Will Quince told the House that the DWP would not be appealing the Court of Appeal's decision.
• He also questioned the Minister on when the universal credit computer system would be fixed.

COMMONS

Raise the rates of legacy benefits to support people hit hard by coronavirus pandemic, not just Universal Credit, say MPs

• Raise level of pre-Universal Credit benefits – Government must not ‘simply ignore the needs’ of people claiming legacy benefits
  • The Committee heard evidence that coronavirus has increased living costs for disabled people. In a survey of 224 disabled people in April, the Disability Benefits Consortium reported that 95% of people surveyed had experienced a rise in costs for food, utilities and managing their health.
  • While the Government has raised the rates of standard Universal Credit and basic Working Tax Credits by £20 a week for 12 months, people on benefits yet to be replaced by UC, including Jobseekers Allowance, Employment Support Allowance and Child Tax Credits, have not been similarly helped, with the DWP blaming operational difficulties for the disparity.
  • The Committee argues that it is unacceptable that people have been left facing hardship through no fault of their own, simply because of the outdated and complex way in which so-called legacy benefits are administered. It calls on the DWP to boost the rates by an equivalent amount to the rise in UC, backdated to April.   
• Suspend No Recourse to Public Funds condition - ‘Hardworking and law-abiding people are being left without a social safety net’
  • The report calls for the immediate suspension of the no recourse to public funds (NRPF) condition that has prevented thousands of people who live and work in the UK legally from claiming benefits and receiving access to financial support, because of their immigration status. Some have children who were born in the UK.
  • There is no official estimate of the number of people with NRPF, but the Children’s Society has estimated that the number exceeds 1 million and includes at least 100,000 children.
  • The Committee argues that during a pandemic it cannot be in the public interest to expect people, some of whom are key workers and front-line medical staff, to comply fully with restrictive public health guidance while simultaneously denying them full access to the welfare safety net.

  
  Rates of older benefits must be raised to provide help for millions of people who have not yet moved to Universal Credit and who are struggling to meet the extra inescapable costs imposed by the coronavirus pandemic, the Work and Pensions Committee says today. The report on the Department for Work and Pensions’ response to the coronavirus outbreak finds that the pandemic has left huge numbers of people struggling to cover the costs of essentials, with some disabled people in particular hit hard by increased costs of care and rising food prices.

Chair's comments 

• Without their actions, the impact of the pandemic could have been much worse.
• The focus has mostly been on the unprecedented numbers of new claims for Universal Credit.
• But in the background, people on legacy benefitsincluding disabled people, carers and people with young familieshave slipped down the list of priorities.
• Its now time for the Government to redress that balance and increase legacy benefits too.
• Large scale employment programmes take months to set up: DWP needs to get on top of this now.
• But in the background, people on legacy benefitsincluding disabled people, carers and people with young familieshave slipped down the list of priorities.
• The Government must suspend these rules for the duration of the pandemic.

DWP at ‘heart’ of Government response to coronavirus pandemic – further conclusions and recommendations

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