Furlough and Household Financial Distress during the COVID-19 Pandemic*

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.