Furlough and Household Financial Distress during the COVID‐19 Pandemic*
| Published date | 01 December 2023 |
| Author | Christoph Görtz,Danny McGowan,Mallory Yeromonahos |
| Date | 01 December 2023 |
| DOI | http://doi.org/10.1111/obes.12556 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 85, 6 (2023) 0305-9049
doi: 10.1111/obes.12556
Furlough and Household Financial Distress during
the COVID-19 Pandemic*
CHRISTOPH G¨
ORTZ,† DANNY MCGOWAN† and MALLORY
YEROMONAHOS‡
†University of Birmingham, Birmingham, UK(e-mail: c.g.gortz@bham.ac.uk)
‡University of Sheffield, Sheffield, UK(e-mail: d.mcgowan@bham.ac.uk)
Abstract
We study how being furloughed affects household financial distress during the COVID-19
pandemic in the United Kingdom. Furlough increases the probability of late housing and
bill payments by 30% and 19%, respectively. At the aggregate level, furlough increases
the incidence of financial distress by 3.38 percentage points. To offset furlough-induced
income reductions, individuals significantly reduce consumption and spend savings.
Relative to unemployment, the potential alternative in the absence of a furlough scheme,
furlough reduces the incidence of financial distress by 95%. Estimates show an 80%
government contribution to furloughed workers’ wages minimizes the incidence of
financial distress at the lowest cost to taxpayers.
I. Introduction
Furlough schemes were one of the primary instruments governments across the world used
to mitigate the economic damage of COVID-19. The policy attempts to safeguard jobs
and incomes by allowing employers that are adversely affected by the pandemic to place
workers on temporary leave rather than make them redundant. While the government
pays the majority of a furloughed worker’s wages, employers often choose not to pay the
remainder. Furlough can therefore lead to large income reductions that create financial
difficulties for many households. At the same time, due to their widespread usage, furlough
schemes place heavy burdens on public finances. It is therefore crucial the schemes are
effective in preventing household default while remaining financially sustainable.
In this paper, we present novel evidence on whether furlough provokes household
financial distress. We evaluate this relationship using data from the United Kingdom (UK)
JEL Classification numbers: D14, D31, E24, G51, H24.
*We thank the editor, Francesco Zanetti, two anonymous referees, Jagjit Chadha, Mathieu Despard, David
Dickinson, Hisham Farag, Aditya Goenka, Hande Kucuk, Paul Mortimer-Lee, Barry Naisbitt, Enrico Onali, Louise
Overton, Arisyi Raz, Karen Rowlingson, Anthony Savagar, Craig Thamotheram, Chrysovalantis Vasilakis, and
Peter Zorn and participants at the Center for Household Assets and Savings Management seminar, the Economic
Response to Covid-19 Workshop, and the National Institute for Economic and Social Research seminar, for
helpful comments and suggestions. This work was supported by the Economic and Social Research Council
(grant number ES/V015958/1).
1157
©2023 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and
reproduction in any medium, provided the original work is properly cited.
1158 Bulletin
where the Understanding Society COVID-19 database provides eight waves of nationally
representative, individual-level microdata between 1 April 2020, and 30 April 2021.
Despite the government contributing 80% of furloughed workers’ wages up to £2,500
per month via the Coronavirus Job Retention Scheme (CJRS), the average individual
experiences a furlough-induced income reduction of 14.6%. We conjecture that the
negative income shock during a furlough spell compromises individuals’ ability to remain
current on housing and bill payments.
Using a matched difference-in-difference estimator, we find evidence that these
mechanisms are operative and economically meaningful. During the pandemic, a
furloughed individual is 30% more likely to be late on housing payments and 19%
more likely to be late on bill payments, relative to a similar non-furloughed individual.
Despite these large relative effects, owing to the low incidence of financial distress
among non-furloughed workers, furlough has a modest effect on financial distress for the
UK workforce.1Consequently, furlough increases the aggregate incidence of financial
distress by 3.38 percentage points. The design of the CJRS thus appears to be successful
in mitigating strong rises in the number of households experiencing financial hardship
during the COVID-19 pandemic.
A key question for policymakers is, what is the optimal government contribution
to furloughed workers’ wages that minimizes financial distress at the lowest cost to
taxpayers? Estimates show that the probability of financial distress is similar (3.5%)
for individuals experiencing a furlough-induced income contraction of 20% or less.
Increasing the government’s contribution would thus do little to lower the incidence of
financial distress. However, the probability of financial distress increases with the size
of the furlough-induced income reduction above 20%. A 40% (60%) fall in monthly
income due to furlough leads to a 4.20% (4.90%) increase in the probability of financial
distress relative to similar non-furloughed workers. These patterns are consistent with
evidence showing individuals mostly default on their financial obligations when they suffer
extremely large income reductions (Gerardi et al.,2017). A government contribution of
80% to monthly wages therefore minimizes the incidence of financial distress at the lowest
cost to taxpayers. This is important since the CJRS is a temporary complement to the
existing set of automatic stabilizers that cost £68.5 billion, equivalent to 8% of annual
government expenditure.
While furlough increases the incidence of financial distress, the effects differ sharply
according to home ownership status. Whereas furlough significantly increases the
probability that a renter falls behind on housing payments, it has no significant effects
among mortgagees. This is consistent with furloughed mortgagees using the mortgage
holiday scheme to defer housing payments which allows them to reduce expenditure
and free up funds to remain current on bills.2However, both furloughed renters and
mortgagees are significantly more likely to be late on bill payments.
1Among non-furloughed workers 2.6% are late on housing and 13.4% are late on bill payments.
2The mortgage holiday scheme is a separate policy introduced by the government and lenders in response to the
pandemic that aims to grant mortgagees time to stabilize their finances. Mortgagees adversely affected by the
COVID-19 pandemic can defer mortgage payments by 3– 6 months. This does not reduce the outstanding balance of
their mortgage, and interest continues to accrue during a mortgage holiday such that the overall cost of the mortgage
is higher in future. 1.9 million mortgagees took a mortgage holiday between March 2020 and July 2021.
©2023 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
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