The best intentions won’t save a bad plan
Youth wage subsidy will bring little relief — and may cause harm, writes Brad Brockman
THE Employment Tax Incentive Bill, which will enforce the much contested youth wage subsidy, awaits President Jacob Zuma’s signature. It will allow private businesses to get a subsidy through the South African Revenue Service for each worker they hire between the ages of 19 and 29 who earns between R2 000 and R6 000 a month — with the amount being halved in the second year.
This, the government says, will encourage businesses to hire more unskilled youths, providing them with valuable work experience.
The commitment shown by the government to tackling youth unemployment is commendable. A youth wage subsidy is, however, unlikely to help us in this urgent task. Local and international evidence suggest that this “policy experiment” will not do much, if anything, to increase overall employment.
The youth wage subsidy fosters illusions about the causes of youth unemployment and represents a real threat to the already low wages received by workers. There is little available evidence that a youth wage subsidy will create jobs. Around the world, wage subsidies are not succeeding in recovering jobs lost during the economic crisis.
In 2011, the Treasury estimated that the subsidy would create 133 000 new “sustainable” jobs for young people (jobs lasting six months or longer). However, many of the studies cited to support this are contradicted by more recent works or do not isolate the effects of wage subsidies (but instead rely on a combination of labour market policies).
A World Bank discussion paper by Bechterman, Olivas and Dar, looking at 159 studies, said that most subsidy schemes did not have an overall positive impact on the employability or earnings of workers. This supports the findings of a 2006 study commissioned by the Human Sciences Research Council, which found that “available evidence is discouraging . . . the employment effects from firmside subsidies that do exist are small”.
More recent reports are not particularly positive either. The World Bank’s World Development Report 2013 found that “Proper cost accounting can reduce the estimated employment impact of wage subsidies by up to 90%. Aggregate employment effects are hence low at best.”
To produce some evidence specific to South Africa, the Uni- versity of the Witwatersrand was commissioned by the government to run an experiment to test the effectiveness of wage subsidies in the economy.
One group of workers was given a voucher that entitled businesses to get reimbursed up to R833 a month when hiring them (like a wage subsidy, sort of); another group was not given the voucher. The results showed that the voucher holders were 25% more likely to be employed one year later than those without vouchers. It is an important finding, but one that requires careful interrogation.
The study does not show that total employment in the economy was higher as a result of the voucher. It just tells us that those who received it were more likely to find a job. And this may simply be because the voucher holders became more motivated to look for jobs, or any other reason unrelated to the greater overall demand for labour from businesses. Most employers did
A World Bank paper says most such schemes do not have an overall positive impact on the employability of workers
not even claim the voucher that was available to them.
In addition, 21% of businesses participating in the study openly admitted that they would use the voucher to replace existing workers with subsidised younger ones. Since many businesses probably would not admit to this publicly, this percentage is likely to be higher (even with a minimal punishment).
The Treasury’s initial study projected that 58% of subsidised jobs would not be new jobs, but jobs obtained through displac- ing existing workers. International evidence suggests this may be much higher.
The economics of the subsidy are uncertain even on paper. Businesses may simply pocket the increased profits arising from having their labour costs subsidised, instead of using them to increase investment and expand production, thereby creating more job opportunities. Moreover, the presence of a subsidised pool of labour would most likely put downward pressure on overall wage levels, especially once the subsidy ends.
The subsidy creates misconceptions about the root of the problem by arguing that South African labour is relatively uncompetitive because it is too expensive, and that cheap (or subsidised) labour is the solution. However, South Africa’s labour force is relatively uncompetitive because it lacks the skills, machines, transport and healthcare, work incentives and food allowances to which work- ers in comparable countries have access.
The government should be channeling its available funds to labour market interventions for which there is realistic evidence. Improving the quality and equity of education and the skill levels of youths has consistently been shown to improve work outcomes. However, the requirements to engage in training are strikingly absent from the bill. The R5-billion the subsidy will cost could be spent on upgrading and massively expanding enrolment in further education and training colleges, improving school infrastructure, structured internship and training programmes, or creating a national youth service scheme.
The youth wage subsidy is at best a distraction from— and at worst harmful to — tackling South Africa’s unemployment crisis.
Brockman is the general secretary of Equal Education