I posted the following as a Twitter thread this morning, but it is just as relevant here. I make the point simply to explain the structure of this post:
The government is thought likely to offer a replacement for furlough today that will make employers pay a significant part of the cost of keeping employees on when there is no work for them. This will not solve unemployment. It will encourage it.
Let me offer a simple example. Assume an employer has 10 employees, all on £2,000 a month. The employer has enough work for five people. They could sack 5 people and save £10,000 a month. Or Sunak offers a scheme where all ten are kept.
Under this scheme the company pays for the work the employees do, i.e. £10,000. Then it pays 1/3 of the wages for the time they're not working i.e, £3,333. The government then pays 1/3 of their wages when not working i.e. £3,333. And the employees lose £3,333 in wages in total.
But this means wage cost per employee time worked has gone up by a third when the business is facing a massive downturn in its business and threat to its survival or it would not be thinking about doing this. Wage cost to the business is now £13,333.
So rationally, any business that knows this might last for at least six months, as the government says we should expect, will look at this scenario and sack half its employees and get the same work for much less cost.
In fact, any business facing this situation will probably have no choice but sack staff and nit use this scheme if it is to survive. That's because any scheme like this is an invitation to make people redundant, and not a job retention scheme.
Let's sincerely hope that Sunak does not deliver this CBI created idea.
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Here we are in what is really a war with this virus, and yet – still – this stupid Government will use the rhetoric of war but not the financial mechanics of war to deal with it.
They are effing useless.
Sacking employees is not cost-free either, although it should be a one-off cost.
What might the cost be to your employer of making half of its employees redundant? Perhaps a few week’s salary or pay in lieu, plus a few weeks redundancy if they have been employed for at least 2 years, each? Perhaps £2k each times five?
Yes
But that’s less than six months of this scheme – and delivers certainty which this scheme does not
Well, I’ve always felt that what this crisis was lacking was more vapid slogans; how nice of Sunak to deliver on this front.
Blow me down with a feather – Sunak has gone with the solution that will lead to increased unemployment (at the very least). https://www.theguardian.com/politics/live/2020/sep/24/uk-coronavirus-live-news-covid-19-latest-updates-rishi-sunak-furlough
The same calculation when the company only has a third of the work available is even worse, with an effective cost increase of 84% to keep all its staff on.
They could sack seven staff (the remaining three have to work a bit harder, but it’s hard to keep 0.33 of a person alive and working) and reduce their wage bill to £6,000. Or they could keep all ten staff working for a third of the time at a cost of:
10 staff * ((£2,000 salary * 0.33 worked) + (0.67 not worked * £2,000 salary * 0.33 employer top up) = £11,022 = 84% increase over firing seven staff.
So the cost increase gets worse the less work the company has. Wow.
Indeed
Is there any explanation of why we are not simply replicating what the German Kurzarbeit scheme does? As I understand it, in Germany, the employer pays for the (shorter) hours actually worked, and the government pays the employee a top up payment of 60% (or more) of the wages lost (plus social security costs).
Why does Sunak’s scheme require the employer to pay a contribution to the period when the employee is not working?
Heaven knows…