Dr Mallory Yeromonahos, Lecturer in Economics, has co-authored a new study which has found that while furlough schemes have been effective in preventing mass unemployment during the COVID-19 pandemic, the reduction of income increased the probability of late housing and bill payments by 30% and 9% respectively.
New collaborative research co-authored by Dr Yeromonahos and led by Professor Danny McGowan and Dr Christoph Görtz from the University of Birmingham examined household survey data from the Understanding Society Database to uncover the first evidence on whether the UK furlough scheme was designed effectively, and whether it prevented household financial distress during the COVID-19 pandemic. The team found that while furlough schemes have been effective in reducing unemployment levels, furlough increased the probability of households’ late housing and bill payments by 30% and 9%.
The study, which is available as a working paper through the Social Science Research Network (SSRN), investigated the use of Short-Time-Work (furlough) schemes to mitigate the economic damage of the COVID-19 pandemic. The researchers found that furloughed individuals significantly reduced their expenditure and spent more of their savings to offset furlough induced income reductions, creating wealth inequality but lowering the probability of financial distress. These changes in spending patterns persisted even after furlough had ended and the individual was back in regular employment.
However, their estimates show that the UK furlough scheme is well designed in that, with 80% of government contribution up to £2,500, the government contribution to furloughed workers’ wages minimized the incidence of financial distress at the lowest cost to taxpayers.
Furlough policy attempts to safeguard jobs and income by allowing employers that are adversely affected by the pandemic to place workers on temporary leave rather than make them redundant. During a furlough spell, the government pays part of a worker’s wages up to a maximum amount.
The researchers believe that this work will provide valuable information and lessons about the effectiveness of furlough policy as the world continues to face the COVID-19 pandemic and as the furlough scheme comes to an end in September 2021.
Talking about their research, Dr Yeromonahos, Dr Görtz and Prof McGowan said: “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 full study on the SSRN website.
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