The furlough scheme for staff needs to be phased out gradually to tackle rising unemployment, a think tank said.

The call comes in a report by the Resolution Foundation, which also urged the chancellor to encourage wider job creation by introducing a wage subsidy scheme for hard-hit sectors.

The foundation said almost two million workers were unemployed or fully furloughed in January – and had been for at least six months, “highlighting the scale of lasting damage to the UK’s labour force that will need to be addressed in the Budget”.

Called ‘Long Covid in the labour market’, the report found that the number of workers on the Job Retention Scheme (JRS) has risen to around 4.5 million during the current lockdown – half the nine million peak during the first lockdown – showing that its impact on the labour market has been “far less severe as firms have adapted to operating through the pandemic”.

However, it warned of “the cumulative impact” of the crisis “in the form of long-term furlough”.

About 700,000 workers had been unemployed for at least six months in January, while a further 500,000 workers had been fully furloughed (not working any hours) for that many months.

Because some people have moved between unemployment and full furlough in recent months, the total number who were unemployed or fully furloughed in January, and had been so for at least six months, was 1.9 million.

Furthermore, many workers remain concerned about their own job prospects.

About 8% of workers currently employed either expect to lose their jobs in the next three months, or have been told that they would be made redundant.

This figure rises to 21% among those who have been furloughed for at least six months of the crisis.

The foundation says the Chancellor should “respond to the risk of long Covid in the labour market by setting out his own roadmap for phasing out the JRS that is sensitive to public health restrictions and the sectoral nature of the crisis”.

The report calls for the full JRS to remain in place for several months after public health restrictions have been lifted to give firms time to bring staff back and remain in place for longer in sectors still subject to legal restrictions, such as hospitality and leisure.

The JRS should then be phased out by gradually, increasing the minimum hours required of workers in order for support to be provided, said the report.

“The chancellor also needs to ensure support for the long-term unemployed is delivered by extending the Kickstart Scheme into next year,” it added.

“Finally, the Chancellor can encourage wider job creation by introducing a wage subsidy scheme targeted at maximising employment in hard-hit sectors.”

Nye Cominetti, senior economist at the Resolution Foundation, said: “Ten months into the crisis, almost two million people have now been affected by long Covid in the labour market, having not worked for at least six months.

“And while the UK’s economic prospects are finally looking up, job insecurity remains high, particularly among those who have spent long periods not working, or who are currently furloughed.

“The chancellor must use his Budget to set out his own roadmap for phasing out the furlough scheme gradually and in a way that acknowledges where the risks of rising unemployment are highest – in sectors like hospitality.

“This would keep a lid on rising unemployment and encourage firms to bring back existing workers, while tax breaks on hiring could help more people to move jobs too.”