This week’s feature of our “life after lockdown” series (check out part 1 on personal lifestyle changes here), turns the spotlight on economic resilience.
Covid-19 has disrupted our lives on many levels. Real-time data on Citizens Advice search queries paint a dark, yet informative picture of people’s most common concerns and how they have changed over the course of pandemic. ‘Divorce’ is trending upwards and spiking every Sunday. ‘Furlough’ started out at the top of the leaderboard for most searched words for a 66-day streak, but has now been replaced by ‘redundancy’.
Plenty of other data sources convey a similar message. Perceptions of job security fell sharply in April and remain on low across all industries. Falling incomes have put strain on household finances: About half of all UK households believed they would struggle to meet their financial commitments in April and 24.1% reported that their household finances were affected in early June. The individual experiences may differ considerably, but an overwhelming 68% of UK adults say they are very or somewhat worried about the effect that COVID-19 has on their life.
The crisis forced us to adapt to changes in all spheres of life, including our economic activity: Most consumers reduced their spending during lockdown, leaving some with a greater financial cushion and an opportunity to rethink their spending habits. However, much of the reduction in spending has been driven by non-essential goods, which means that those with tighter budgets have less opportunity to cut their spending and may struggle to make ends meet.
94% of us think that it will be at least another 2 months until things return to normal. During this time (and beyond), we will face further pivotal moments at which we may (need to) adapt, for example when the lockdown lifts further, when people start going back into work, and when support like the furlough scheme ends.
Some adaptations will be tough. But, at best, we can use some of these moments as an opportunity to break with potentially harmful habits and adopt and sustain new ones (see also part 1 of this blog series). Here are some ideas how behavioural science can help make the lifting of the lockdown a ‘fresh start’ into a strong and sustainable economic recovery.
1. Prompt (prospective) jobseekers to consider other career paths early on
Covid-19 has already caused enormous job losses and there may be further losses in Autumn when support like the furlough scheme is withdrawn. Social distancing and other rules to minimise infection spread are likely to mean that some businesses such as restaurants, bars, hotels and the event industry struggle to make enough money to stay viable. Therefore, our efforts to get people back into work should assess ways to channel jobseekers into sectors that are likely to recover more quickly – such as retailers selling durable goods, and sectors where demand is likely to grow in the future due to other long-term trends such as investment in green energy.
Major job platforms could become a key player in prompting workers and jobseekers to other, more promising professional fields, geographic locations or development opportunities that they otherwise wouldn’t have thought of.
People are often unaware of opportunities that lie within their reach to adapt their skills and experience or retrain. They may be held back by low motivation, lack of time or poor information. Behavioural insights combined with data on skills and job requirements can be used to identify these opportunities and prompt workers towards them. If these prompts work well, they could ease economic recovery and improve economic well-being, by getting people back into work quicker.
2. Shape economic communications to build confidence in recovery
Consumption is indispensable for a strong and quick recovery. Emerging data from other countries such as the US, shows that the drop in consumer spending does not yet reflect losses in household income. A large part of the reduction is on in-person services like transport and hotels which were locked down. But part of the reduction is also likely to be based on negative sentiments or anticipation. 62% of UK consumers are very or extremely concerned about the UK economy. Uncertainty is the prevailing consumer sentiment towards the UK’s ability to recover and pessimism has grown since March.
Government communications are key to building economic confidence. Communications about how the Government is supporting the economy and how it plans to act in the event of future shocks – such as further local outbreaks – can help build credibility that the Government is acting and will continue to act to support the economy. Success will not only depend on the type of policies announced but also on the language in which they are framed.
Behavioural insights and quantitative testing can help shape comms for maximum impact. For example, past work of BIT and the Bank of England on their inflation report has shown an increase in comprehension as well as in ratings of the trustworthiness of the information when the language was simplified and made more relatable to people’s daily lives (for instance relating the fall in the value of the pound to the cost of holidays abroad).
3. Help consumers find the right balance between spending and saving
Once the economy reopens, many sectors will rely on active consumer spending in order to recover. While increased consumer spending is essential for recovery, households should also use this period of reduced spending to build a savings buffer to help them weather any future income shocks.
The current crisis underlines the importance of having rainy day savings: Since April, ONS data shows week by week that 16.5%-34.3% of UK households have used their savings to cover living costs. The absence of savings leads to increased use of high cost short term credit and increased anxiety over personal finances. This in turn leads to worse decisions overall and a negative impact on other areas of life such as health and productivity. Covid-19 has meant that many people have cut spending and built up savings for the first time. Right now, as people return to work and get back to their normal lives we have a timely moment to turn this into a savings habit.
Automated schemes such as payroll savings are an effective way to encourage regular savings by making it effortless and psychologically ‘painless’ to save. In addition, financial product providers could offer ‘Repay and Save’ products where consumers can consolidate their debt and then divert the loan payments into a savings scheme once the loan has been paid off.
But how can we promote saving and spending at the same time? The key to bringing them into harmony could be the clever usage of open banking data and behavioural science: Based on the customers’ current level of savings and changes in income and spending during lockdown, banks and fintechs could identify those who can and should save.
They could prompt customers with higher-than-usual balances on their current accounts to split their spare money between an ‘indulgence’ pot to be spent as lockdown easens and a ‘savings’ pot for rainy days. The recommended default split could be adapted to each customer’s individual need and capability to build a rainy day savings buffer.
The idea of a crisis as a reset opportunity is not a new one, and there is no shortage of historic examples where the hope for positive change remained unfulfilled (see the current BBC Radio 4 Rethink series). When previous economic shocks hit us our understanding of how behavioural science can help design better public policy was still in its infancy. Today however we have the knowledge and evidence to truly take advantage of behavioural insights for the very first time and bring them right into our economic policy making processes.Now is the time to discover which role behavioural science has to play in building back better.