The first COVID-19 outbreak happened between September 13th to November 7th in 2019 in Wuhan province in China (Forster, et al., 2020) and has now become a global pandemic. Under this context, by comprehend empirical evidence, this paper aims to explore the economic impact on unemployment but we also will discuss wage, indirect effect to GDP growth caused by COVID-19 in UK and what policies should government take to counter this economic shock.
Economic theory
Unemployment and wage
Total population refers to all UK residents. In short term, by neglecting numbers of new death and birth. The total population is fixed. Within the population, by excluding those that are unable to work such as children and student, the remaining of the population is the ‘workforce’. We accept the fact that there is always someone out of work and the others are in work. ‘Natural rate of unemployment’ express the minority who is out of work in number.
The model below is a close illustration of what might happened to employment sector in UK. Worker’s welfare is expressed in its real wage, the real purchase power from their monthly earning. This model assumes firms are in imperfect market (i.e. restaurant) and has as degree of wage setting power, hence the ‘Price-setting curve’ is flat. Firms cannot monitor labour’s working effort, but they will find the right employee after series trials and expect working effort is equal to the real wage of which they have decided on. Wage is just enough to give enough of incentive for workers to work hard.
Wage-setting curve represent a collection of all real wage level that is enough for workers to work hard. Workers will quit job and look for alternatives if they are not satisfied with the wage. Point X represent long term equilibrium.
The objective of companies is to maximise profit, where the difference between λ and price setting curve is the profit per worker earn by companies. λ is the average revenue each unit of labour generate. Below is a graphical illustration of demand, wage setting and profit earned by company. In this scenario, it assume each unit of goods produced by each labour is sold under demand1.[image: ]
Consequence of Lockdown-wage and unemployment
To contain spread of COVID-19, lockdown policy was introduced on 23rd of March for three weeks in UK and has extended lockdown to another three weeks on 16th of April. (Supastar, 2020) Policy include banning large gathering, closing bars, café, pubs, schools. Citizens should work from home and only go out for necessities shopping. Online shopping is encouraged, delivery and post are running as usual. (Burgess, 2020)
This policy will lead to decrease in demand for restaurant and small businesses, shifting demand1 to demand2, resulting in decrease in λ to λ2. Based on the model, to be able to make same profit as before, firms will decrease employee’s wage to a lower level to wage-setting2, lead to downward movement along on price-setting in graph 1, leading to increase in unemployment level in UK at point A, and partial unemployment from each restaurant and small businesses. As suggested by OBR, COVID-19 outbreak creates temporary shock to government tax revenue, demand for goods and supply. (Responsibility, 2020). Decrease in demand cause less tax revenue to government as less demand for goods means less VAT, which decrease budget balance. Reduction in demand implying potential slowdown in UK economy.
Before the pandemic, two million jobs are created in UK from tourism. Tourism is account for 7.2% of UK’s GDP. (Ferries, 2020) Publish data from ‘Indeed’ show that vacancies have fallen by around 70% in the food preparation and service, hospitality and tourism. (Kennedy, 2020) Vacancies are falling substantially across retail, hotels, and construction in UK experience sharp decrease, (Confederation, 2020) further increase likelihood of an economic slowdown.
Chart in below showcase consumer confidence as time increases.(Gfk, 2020) Between 2020 and end of 2019, there’s a significant drop in consumer confidence to around -33, by comparison, consumer confidence index was around -40 in 2008 global recession, suggesting that consumer is less likely to spend money, hence decrease in consumer demand.
This evidence suggest UK is experiencing decrease in demand on hotel, restaurant and bars industry. Necessities demand experience high growth in March but is likely caused by stockpiling.[image: ]Estimation from ‘PoundSterling Live’ (Skinner, 2020) suggest current unemployment rate in UK could be as high as 7.9%. Jobseeker’s allowances and Universal Credit application experience surge of 692% from 120,000 in March 2019 to 950,000 in recent weeks. (Foundation, 2020) OBR estimate the unemployment rate is around 10% with 35% decrease in real GDP in second quarter.(Responsibility, 2020) Recent ONS data(Statistics, 2020) suggest that overall, around 30% of companies from all industry is report to be laying off staff in short term and 52% for Accommodation and food industry. [image: ]These statistics suggest UK unemployment rate is increasing.
However, COVID-19 provides unprecedent opportunity and enormous demand to delivery industry to grow, such as royal mail, and Deliveroo. The existence of these companies act as a countershock to the slowdown of UK economy. However, the countershock effect is constraint by their capacity to provide services. To expand the capacity to provide service, delivery and online shopping industry can increase their production scale, for example, Amazon is hiring 75,000 more workers to keep up with the increase in demand. (Yurieff, 2020) However, mass hiring from these industries now could create potential future mass unemployment after the pandemic when demand rapidly descending.
Policy suggestion
In short term, Government should provide financial help to household face difficulties due to the pandemic, such as issuing zero interest loan for small businesses, provides subsidies to UK tenant to levitate rent, speed up and expand capacity for dealing University Credit application process, and reduce tax rate.
In the long run, government should not rely on ‘helicopter money’ as it may cause bigger issue such as hyperinflation explained by fisher equation. To prevent this from happening, government should attempt to reduce amount of cash in cycle action by raising tax.
Government should priorities restricting COVID-19 and shorten lockdown period as quickly as possible to move in recovery stage. For example, by prioritising the development of quality and quantity of COVID-19 test kits, government will be able to carry mass diagnosis to pin out those with immunity and test negative to work in a safe zone, gradually filtering the rest of population to safe zone during the pandemic to move to recovery stage.
Conclusion
In this paper we have discussed possible effect of UK recession on unemployment, wage and GDP growth. Before vaccination came out, UK’s economic slowdown is inevitable. Future mass unemployment is likely to occur. How can the UK government help by knowing what might happened in the future to unemployment and wage? In short term, ‘printing money’ seems to be useful but how long is ‘short run’? How much money should the government to give? They are hard question to be answered now but it is easy to answer in long term and that is, the future will give us the answer.
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