Furlough (part 1)
Induce a seperating equilibrium
By mid-March 2020 it was obvious that the UK was heading for lockdown. Firms would have no choice but to lay people off. That is what happens when you have no revenue coming in. The best guess was 3 million layoffs which is, pro rata, exactly what happened in the US. Unemployment would have hit 4 million – the highest in UK history.
The government wanted to avoid this, for social, economic and political reasons. Losing your job is one of the most stressful things that can happen. Even if the government banned evictions, the strain on people – at a time of such uncertainty – would have been huge. Job losses are also economically inefficient when the economy is expected to reopen – having to hire people from scratch would be slow. (Back then we did not expect the lockdown to last as long as it did). Having 3 million lose their jobs would also have had economic knock-on effects. Those people would obviously stop spending money, and others would stop spending money fearing that they would be next – causing the economy to contract even further.
I was the then-Chancellor Rishi Sunak’s economic adviser at the time. This was a civil service post, not a political one, but I was appointed directly by the Chancellor. I did this role for both Sajid Javid and Rishi Sunak.
Rishi asked to me to work with on an employment support programme. In the next 15 minutes, while on the train, I decided furlough was the answer. It was probably the most useful 15 minutes of my life.