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From the file

Recession 2021 | 2020 was a year of health crisis. 2021 will be a year of economic crisis.

Worse for some

Worse for some

Wednesday 21 October 2020

The economic pain is being felt differently by different people. For many of them, warns Torsten Bell, rock bottom is still to come


The “pan” in “pandemic” is a dangerous prefix. As the virus straddles the globe, those three letters can give the impression of an equality of impact that is very far from the truth.

On the health side this is blindingly obvious, with death rates from Covid-19 climbing sharply with age and, as in previous epidemics over the centuries, households in poorer areas seeing higher infection rates.

But the economic effects are also far from uniform. They reflect the nature of a virus that spreads through face-to-face contact; the make-up of our service-heavy economy; and the huge role of policy in softening, but far from eliminating, the blow of this economic catastrophe.

Eight months in, as our expectations finally catch up with the reality that the pandemic is here to stay, we should be taking stock of where this complex web of factors has left us, and what it tells us about who will bear the economic pain in the months to come.

Blackpool town centre in April 2020 – under lockdown

People often simply say this crisis is making inequality worse. But the reality is far more nuanced and, in some respects, under our control than that.

The initial phase of this crisis took the form of a huge labour market shock as we shut down, and then slowly reopened, swathes of our economy to control the virus. The main determinants of how that shift affected you were your age and your earnings.

More than half of under-25s had been furloughed or lost their jobs by June, compared to less than a third for almost all other ages groups. It’s no surprise that the number of 18 to 29 year-olds reporting higher-than-normal levels of mental health problems was more than 50 per cent above pre-pandemic levels. The economic shock is causing one health shock even as it helps us to contain another.

Low earners also stand in the centre of the economic storm. They have borne the biggest health risks while higher earners were able to work from home. They are also three times as likely to have been furloughed as high earners, and four times as likely to have lost their jobs in the first phase of the crisis.

It’s the uniquely sectoral nature of this crisis that has pushed the burden onto the low paid and young. Social distancing is death to the sectors they work in, such as hospitality, leisure and retail, but more of an inconvenience to, say, IT and accountancy. 77 per cent of hospitality workers were furloughed at some point – ten times the rate in finance.

But understanding that the lowest earners have been hardest hit is only the start for understanding the impact of the crisis.

As it happens, the hit to family incomes has been much more equally shared across low-, middle- and higher-income families than the job losses have been amongst low, middle and higher earners.

Why? Two reasons stand out. First, lower-income households have fewer workers in them. With half of the adults in the bottom fifth not working before the crisis, their incomes are less exposed to what is fundamentally a big shock to labour market income.

Empty streets where Petticoat Lane Market would normally be

Second, policy makes a huge difference to how shocks to labour market income translate to actual family incomes. The Job Retention, or furlough, Scheme is the most high-profile government intervention, ensuring that, until the end of this month, people unable to work receive 80 per cent of their previous salaries. At the scheme’s peak, 8.9 million employees were furloughed – meaning that, while lower earners were most affected, their incomes were protected.

Even more important for lower-income families was Rishi Sunak’s £9 billion boost to social security that kicked in alongside the lockdown. This increase in income from the state, coming at the same time as the decrease in income from the labour market, meant that the overall incomes of the poorest fifth were close to being unchanged in the first phase of this crisis. Without this policy action they would have fallen a full 8 per cent.

So if we follow the normal focus of economists on household incomes, we would conclude that the crisis so far has been fairly evenly felt. But that would be the wrong conclusion. With rich and poor all seeing their incomes fall, it is true that inequality hasn’t surged.

But family budgets, and financial strain, are about far more than just incomings. What is going out spending-wise, and where you are starting from, are crucial too.

One way to understand the economics of this crisis is that the rich stopped spending on non-essentials, while lower earners stopped working. These are two sides of the same coin – because it is overwhelmingly higher-income families who spend in the hospitality and leisure businesses where those lower earners are often employed.

In the early weeks of the lockdown, socially distanced shoppers queue outside a supermarket in Leeds

So while higher-income families have seen their incomes fall, they are also twice as likely to have seen their spending fall by over 10 per cent in the initial phase of this crisis, when compared to the poorest households. The result is that their family budgets have come under far less pressure than those of poorer households. The latter do not have lots of non-essential consumption to cut back on.

The aggregate savings ratio – the proportion of disposable household income that’s put aside rather than spent – hit 29 per cent in the second quarter of 2020, on the back of huge savings by higher-income families. Working from home isn’t just saving them time; they are, in many cases, saving thousands on season tickets and expensive holidays.

Which is to say, inequality as we normally measure it isn’t surging – but financial pressure is still falling hardest on lower-income households.

When considering the ability of lower-income households to manage that pressure, remember: history matters. Coping with tough times if you’ve had a good few years is much easier than after lean times.

The last few years have been particularly bad for low-income households, whose typical income actually fell between 2016-17 to 2018-19. To put that in a longer-term context, their incomes were no higher in 2018-19 than they were in 2001-02. This living standards disaster hasn’t been driven by Covid-19 – high inflation and cuts to benefits are where blame lies – but it has nevertheless determined how the virus’s impact is felt.

The first phase of this crisis has been bad for low earners, and seen lower-income families much less able to cope with painfully widespread falls in income. But crises ebb and they flow, they come and go in phases. What does the future hold?

Two features will shape that future more than any others: the mounting up of job losses and the stripping back of government support. The unfreezing of our economy in recent months has brought the important benefit of a return to economic activity, but it has also revealed the damage that has been done.

Manchester takes care, as coronavirus cases start to rise again in the city

Employers who kept people on via furlough are letting them go as they confront the new economic landscape. Last week, we learnt that the UK experienced the largest rise in unemployment in over a decade. With unemployment levels forecast to double or triple from their pre-pandemic levels, we are heading for somewhere between 11 and 17 per cent of 18 to 29-year-olds being out of work later this year. That amounts to between 800,000 and 1.3 million people.

The hardest-hit industries in the months ahead will look very similar to those hardest-hit so far, but within them the relative impacts are shifting over time. While retail was in immense trouble early on, it is now benefitting from shifts in spending away from services and towards goods. Overall retail spending is now back above pre-crisis levels as we buy patio heaters to socialise in our sub-zero gardens, rather than in pubs and restaurants.

By contrast, hospitality and leisure jobs are now most at risk. These sectors have struggled to bring workers back from furlough, and are directly affected by the ramping up of restrictions now. In September, three out of every ten workers in these sectors were still on furlough. Many of these jobs will be lost when the scheme winds up at the end of October.

A sunny September day brings people to the bars of Soho, London

So while the young and low earners will remain most affected by this crisis in the months ahead, the effects will move over from furloughing to outright unemployment. This, in turn, will result in much bigger falls in income – with those losing work and relying on Universal Credit receiving about half the level of income support as they would have done on furlough.

Policy is now at risk of turning from being part of the answer to being part of the problem. The chancellor’s replacement for the furlough scheme – the Job Support Scheme – will not provide the degree of support needed in the next phase of this crisis. While the criticism of it from Labour city mayors has focused on the reduction in support from 80 to 67 per cent of previous wages, the real problem is that far too few people will qualify at all for the support it provides.

The JSS will only support those working for businesses that were legally required to close. In other words, pubs in especially locked-down areas will be protected, whereas restaurants that are simply unable to open with so little business will not be covered.

Where a firm is open but struggling with low levels of demand, the scheme provides little incentive for the employer to choose to cut hours rather than jobs. In fact, it would cost a third more to employ two workers on half-time hours rather than one on full-time

The policy concerns do not end there. Increases to social security payments spared lower-income families from worse pain in the first phase of this crisis, but benefit cuts planned for next April could undermine that work. The decision to reverse the increase in Universal Credit implemented at the start of this crisis will result in a £1,000 income cut for each of six million households.

This would see the level of unemployment support fall to its lowest real-terms level since 1990-91, with the bottom fifth of families losing an almost unimaginable seven per cent of their disposable incomes. What’s more, the hardest-hit areas would be those that currently face stricter lockdowns – with the Red Wall regions of the North being 50 per cent more likely to lose out than the South East.

A food-bank volunteer prepares bags for collection

This is when savings could help, but only where they exist. Higher-income families have strengthened their finances in the first phase of this crisis, while lower-income households have taken on more debt and cannot repeat that exercise as the pandemic drags on. No-one should be relaxed about predictions from the Trussell Trust that this winter could see a 61 per cent rise in need for food banks, compared to the same period last year.

The effect of this pandemic on GDP has probably already peaked. The grim news is that we are probably a long way from rock bottom when it comes to the impact on living standards. Low earners and the young have already been hit overwhelmingly hard; a toxic combination of unemployment and benefit cuts is only likely to weaken their position.

No-one can make this pandemic go away, but we do have the levers to share the pain it brings. Whether we come out of this crisis as a more united or divided country will depend in large part on whether we choose to pull them.

Next in this file

Charting the crisis

Charting the crisis

Chris Cook and Chris Newell take us through the numbers

7 of 11