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Mark Neath warns of unemployment ‘Cliff Edge’

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a line of shadows of people lined up against a red brick wall. Stand in a queue to the changes.

Mark Neath Director of Old Mill says the Chancellor’s new wage subsidy scheme could create a ‘cliff-edge’ of job losses in January 2021

In a candid statement to the Commons, the Chancellor confirmed that the furlough scheme will end as he argued that it is “fundamentally wrong” to keep people in unviable jobs. In its place, Mr Sunak announced a new jobs support scheme (with a similar scheme for the self-employed) designed to allow firms to preserve sustainable jobs.

Neath had this to say on the newly announced Job Support Scheme;

In many ways, Rishi Sunak is between a rock and a hard place in trying to tackle the financial implications six months into this dreadful pandemic. The furlough scheme was always just a bridge to help employers get through the first phase of the crisis, but it couldn’t be expected to continue ad infinitum due to the astronomical costs to the country.

Essentially the government is saying it will directly support the wages of those people in work. This support gives businesses who face depressed demand over the winter months the option of keeping on employees in their roles albeit on shorter hours rather than having to make them redundant. What they can no longer do is continue to pay the wages of those who aren’t coming back to work because their jobs would have ceased in reality, but for the subsidy. 

Under this new wage subsidy scheme employees must work at least one third of their hours. They’ll then be paid two-thirds of their pay for the remaining hours (with both the employer and the government paying one-third each).

It is clearly less generous with employers having to pay more than before, and employees will have to go back into work to qualify. As Sunak said, this new support aimed at those businesses and posts that are viable which sadly means that there will be some business failures, and unemployment will increase – but not by as much as it would have done if he had pulled the plug completely.

The Job Support Scheme is all about moving to a different phase. Six months ago, the focus was on supporting people to stay at home, but the government can’t fund the Coronavirus Job Retention Scheme indefinitely. My fear is that this new shift will temporarily stem but not halt the rise in unemployment. 

The strange thing about this scheme is that, given all the discussion about the German “Kurzarbeit” (short time working) model, this isn’t really a short hours work scheme that encourages employers to cut hours rather than jobs. The scheme tries to drive behaviour in the opposite direction, from no hours up to one-third, instead of a temporary reduction from full-time, which is how the German version works. We don’t yet know whether the incentive works in the opposite direction. Aside from the reduced financial support, businesses will no doubt also be frustrated at having to learn to navigate a third different employment support package in less than a year.

And of course there is the added issue that it may cause a surge in job losses down the line, because, when this new scheme is combined with the £1,000 jobs retention bonus, it provides an incentive for firms to retain workers part-time until they qualify for the bonus at the end of next January. But whether this then becomes a new so-called “cliff edge” in terms of job losses remains to be seen.

 

Mark Neath is a Director for Old Mill and is the firm’s specialist in corporate finance services, including business valuation, financial due diligence, business planning and cashflow modelling.

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