Furlough and Financial Distress during the COVID-19 Pandemic

Presented by Christoph Görtz, Danny McGowan, and Mallory Yeromonahos
Birmingham Business School, The University of Birmingham

We study how being furloughed affects individuals' financial distress during the pandemic. Using panel data from the United Kingdom between April 2020 and March 2021 we find furlough is associated with a 66% increase in the probability that an individual is late on housing payments and a 30% increase in the probability of late bill payments.

The effects are specific to individuals who rent their homes whereas furlough has limited effects on mortgagees who are able to defer mortgage payments through the mortgage holiday scheme. While furloughed, individuals cut their expenditure and this persists even after they return to work such that they are less likely to experience financial distress after a furlough spell.

Furlough creates wealth inequality as individuals draw down their savings to maintain consumption. Estimates from quasi-experimental matching models suggest the inferences are causal. Simulations show that increasing the government’s contribution to a furloughed worker’s wages would do little to reduce the incidence of financial distress but that without the furlough scheme financial distress would have been widespread. 

If you would like to attend this CHASM Seminar, please email me – h.m.a.harris@bham.ac.uk – and the Zoom link will be sent to you.