Britain risks walking into an unemployment trap

Linda J. Dodson

So how does the unemployment trap close? Put simply, a shock like a pandemic creates a negative feedback loop between unemployment, household confidence and businesses.

According to Vincent Sterk, an assistant professor at UCL who has studied the subject, when people fear for their jobs it can trigger such a rise in the demand for saving among households – and hence lower demand for goods – that it puts the economy on a downward spiral. Firms are confronted with a lack of demand for their goods, and cut back on employing workers.

He says a pandemic “increases the chances of an unemployment trap” and warns of an “amplification” effect where firms can even stop hiring altogether.

The academic says: “You get into this low demand trap where people are unemployed, or the risk of unemployment is high, therefore people don’t want to spend and therefore firms do not want to hire workers.”

Another consequence of less hiring is the increased risk that thousands slip into longer term unemployment, become detached from the workforce as skills atrophy, and the natural rate of joblessness rises due to hysteresis, or economic scarring, effects.

The point of the Government’s furlough scheme is to avoid mass unemployment on the scale seen most dramatically in the US so far. But this will most likely be wound down by the autumn, as the UK economy adapts to a sub-optimal social distancing netherworld where the infection remains, a vaccine is lacking, and a comprehensive testing and tracing infrastructure remains notable by its absence.

That very uncertainty puts the trap in danger of being sprung. Just take one stark figure from the Bank’s credit data for March. Consumers paid back almost £4bn during a single month, an all-time high.

It is more difficult to spend money in a lockdown, of course, but the chances of a wild spending spree look remote given the more restrictive conditions set to remain in place. And in a furlough-less world, how many of those lucky enough not to have lost their jobs will not have an eye on a second wave of infection, or some future catastrophe? 

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