The furlough scheme was introduced by the UK government to offset some of the financial burden of the Covid-19 pandemic by attempting to safeguard jobs and incomes. During the furlough period the government paid part of a worker’s wages up to a maximum amount. The scheme appears to have been effective in preventing unemployment in the UK, but has placed a heavy burden on public finances.
Researchers from the University of Birmingham, Christoph Görtz, Danny McGowan and Mallory Yeromonahos, have used Understanding Society to look in detail at how households managed their finances whilst on furlough and the affect the scheme had on levels of financial distress. They also looked at the level of government support provided through furlough and how financial distress would evolve if the wage contributions delivered via furlough were lowered or raised.
Changes in household finances
This analysis shows that households made changes to their money management if they were placed on furlough. While furloughed, an individual was 20 percentage points more likely to cut spending compared to a person who wasn’t furloughed. And this effect continued, even once the person returned to work, suggesting that furlough leads to lasting changes in consumption patterns. The research also found that furloughed workers drew down on their savings to attempt to stabilise their finances. Furloughed workers were 7 per cent more likely to reduce their savings when compared to people who kept working. Regardless of an individual’s pre-pandemic income, reducing spending and spending savings was seen across all furloughed workers, but the impact of the reduction in spending and saving affected individuals with lower incomes more.
Furlough and financial distress
Furlough also appears to lead to financial inequality. For those at the lower end of the income distribution, being on furlough increased the probability of being late with housing payments and being late with bill payments. In contrast, furlough appeared to have no significant effects among individuals who earn above the average income. Housing costs were found to be a key financial pressure point, with furlough increasing the probability that a renter experiences financial distress, but having no significant effect on people with mortgages.
The researchers conclude that while the furlough scheme was effective in preventing high levels of unemployment, the adjustments to household finances that the scheme provoked potentially increased wealth inequality, as workers leave furlough with lower savings relative to non-furloughed individuals. The increase in financial distress during furlough is concentrated among lower-earning workers. Although financial distress increased for some households, when the researchers looked at the level of support provided through the furlough scheme they found that the likelihood of experiencing financial distress is non-linearly related to the furlough induced decline in income. This means that there is essentially no difference in the probability of financial distress between people who experience an income decline of between 0% and 20%.
Dr Christoph Gortz, co-author and Associate Professor in Macroeconomics at the University of Birmingham says: “The UK Coronavirus Job Retention Scheme came to an end in September 2021. Since the pandemic is not yet over, it is important to take stock and learn lessons about the effects and effectiveness of this policy. While being furloughed implied financial hardship and cutbacks for many families, on average, we find that the UK furlough scheme is well designed in the sense that the government contribution to furloughed workers’ wages minimizes the incidence of financial distress at the lowest cost to taxpayers.”
Read the discussion paper Furlough and Household Financial Distress during the Covid-19 Pandemic.
Covid 19Family and householdsIncome and expenditureMoney and finances
