Test youth wage subsidy and adapt it if needed

IT IS unfortunate that the introduction of a youth wage subsidy in SA has become so politicised. Rational discussion about high youth unemployment is now stifled by competing agendas. Youth unemployment is a serious problem worldwide. Since 2007, youth unemployment in the European Union rose from 12,5% to 18%. In Spain it jumped from 18% to 46%. In North Africa high youth unemployment, a major cause of the Arab Spring, is now 28%, up from 23% in 2010. Policy makers around the world are seeking ways to address high unemployment and its excessive concentration among young workers.

The proposed youth wage subsidy in SA is an attempt by the government to start addressing the problem locally. The logic of the subsidy and the problems associated with it are set out in a carefully researched discussion paper published by the Treasury in February last year. It is a must-read for anyone interested in addressing youth unemployment in SA.

The document notes SA’S exceptionally high rate of unemployment is disproportionately focused among young workers. About 42% of people under 30 are unemployed, against 17% of those over 30. Only 12% of working adults under the age of 25 have a job, against 40% in most emerging economies. The burden of job losses has fallen disproportionately on young workers, with more than 20% aged 18-24 having lost their jobs.

Why are employers reluctant to hire young workers? The document shows education levels are not the explanation. South African workers are indeed poorly educated. But unemployment is disproportionately focused on young workers regardless of education levels attained. Unemployment among workers who have completed secondary education or have some tertiary education is 40%-45% for those under 35 years, but less than 20% for those older than 44.

“Education,” the document concludes, “is not a substitute for skills.” Employers rate the skills obtained from work experience as more important than formal education.

There is no magic solution to youth unemployment. A multipronged strategy is required. The most important ingredient is faster economic growth. The document debunks claims of “jobless growth”. Between 2003 and 2008 — when growth was almost 5% a year — SA created about 2-million jobs, of which 90% were in the formal sector. Sectors that were growing rapidly, such as construction (500 000 jobs) and finance (520 000 jobs) created the most jobs. For every 1% rise in gross domestic product growth, employment rose 0,7%. If SA could achieve the targeted growth rates of 6%-7% a year, employment growth would be rapid.

To overcome the reluctance of employers to hire inexperienced workers, deficiencies in the education system must be addressed. The document suggests the answer lies in reducing dropout rates and increasing progression from secondary to post-school education. This is because employment prospects improve significantly for young workers with a tertiary qualification. An alternative suggestion might be to reduce the obsession with a Grade 12 qualification. Those who drop out of secondary education early could be channelled into formal technical training that might be more valued in the workplace.

The document also looks at a multipronged strategy including labour market policies, workplace training programmes, job creation by the public sector, entrepreneurship and schemes to improve the ability of the poor to find work. These can achieve results only over the medium term. In the meantime, a subsidy for young workers is proposed to get young job seekers into the labour market. It is estimated 178 000 new jobs will be created at a cost of R5bn over an initial period of three years. The document notes that “getting that first job is important…. Young unemployed people who have some work experience are over three times more likely to find a job than young people who have none.”

Unfortunately implementation of the youth wage subsidy is bogged down by political infighting between the government and its alliance partners, which claim employers will use it to replace existing workers. This concern is unfounded. High youth unemployment shows employers do not regard young workers as substitutes for experienced older workers and labour legislation makes retrenchment of existing workers costly, more than offsetting savings from the wage subsidy if existing workers are replaced.

The youth wage subsidy is the only substantive idea SA has to address the scourge of youth unemployment and plans are in place to implement it. The political impasse could delay meaningful intervention for years. Rather than do nothing, the scheme should be implemented as a trial so the claims of its supporters and detractors can be tested and the programme adapted accordingly. Lessons can also be learnt from similar schemes in Turkey and Chile. It is time for action.

Keeton is with the economics department at Rhodes University.