Wage subsidy experiment a step in the right direction

There are over six million South Africans who want jobs but cannot find them. At 25 per cent of the labour force, South Africa’s unemployment rate is one of the highest in the world.

Almost three quarters of the unemployed are under the age of 34. Young people are twice as likely to be unemployed as the national average.

South Africa has a national crisis of youth unemployment.

A new report by the Centre for Development and Enterprise (CDE) – JOBS FOR YOUNG PEOPLE: Is a wage subsidy a good idea? – summarises a workshop of international experts, senior policy makers, and business and labour leaders on the pros and cons of government’s proposal to subsidise wages for the young and unskilled.

“While the National Treasury's proposal is not a comprehensive response to the crisis of unemployment, it is a step in the right direction.

It would be a tragedy if this modest experiment were not implemented,” said CDE executive director Ann Bernstein.

“This is the first time that a proposal from government really takes seriously the negative impact of high employment costs on people’s chances to find jobs.

“However, the impact could be magnified if the youth wage subsidy was coupled with a probationary period during which a ‘no questions asked’ dismissal policy applied.”

According to the report, current regulations make it too cumbersome to dismiss recently hired workers.

Making it easier for firms to dismiss new workers would mean the risk would be borne by the worker (who has every incentive to prove his or her abilities) rather than by the firm.

“Giving firms the ability to dismiss new hires makes it likely that employment will increase for exactly that group of South Africans who are most shut out of the labour market,” said Bernstein.

The CDE report quotes the Treasury and internationally-renowned growth economist, Professor Paul Romer, who both argue that inequality is not the best measure of social inclusion.

A much better way to measure social inclusivity is by the proportion of adults who have jobs.

Countries like Brazil may be as unequal as South Africa, but they are far more inclusive because many more adults have jobs. Only 41 per cent of working age adults in South Africa have jobs – a figure substantially below global norms.

Rising wages and increased labour market regulations have made employers more reluctant to hire workers, especially young, unskilled workers who are less productive.

To address the crisis of youth unemployment, government has proposed subsidising the wages of workers aged between 18 and 29 who earn less than R60 000 a year.

Refunding employers a proportion of the worker’s salary would reduce the costs of employing young people. This, the Treasury believes, would induce firms to employ more workers – especially young, unskilled, inexperienced people.

The Treasury has estimated that the subsidy would create about 133 000 jobs between 2012 and 2015, and that each new job created would cost government about R37 000.

The CDE report notes that if the Treasury's estimates are correct, the subsidy will prove to be a more efficient use of public funds than many other interventions.

The equivalent of a full-time job created through the Expanded Public Works Programme, for example, costs about R100 000 per year.

The new funding initiative offered by the IDC will be targeting labour intensive projects in which the cost per job is between R250 000 and R500 000.

However, the report identifies a number of concerns.

“A wage subsidy is a second-best solution,” said Bernstein. Instead of tackling the underlying reasons why employment costs are so high – South Africa’s restrictive labour legislation – the Treasury is proposing that some of these costs be passed on to the taxpayer.

“It’s critical that we start reforming labour market regulations. We are always told that serious reform of the labour market would provoke significant political resistance. But government will have to deal with these issues if South Africa is ever to address the crisis of unemployment,” said Bernstein.

Far from implementing a serious programme of labour market reform, some institutions in government may actually be looking to increase regulations. The Department of Labour recently tabled four Bills which would have increased the costs of employment.

“The Department's own regulatory impact assessment concluded that jobs would be lost if these laws were implemented, but that didn't stop them from taking the draft Bills to parliament. It’s simply staggering,” said Bernstein.

Is a wage subsidy worth implementing even if it is not part of a process of reforming the labour market?

“The Treasury's proposal is modest,” said Bernstein. “We have over six million unemployed people, and if the Treasury’s projections are correct, the wage subsidy will create only 133 000 new jobs over three years while subsidizing 245 000 jobs that would have been created anyway.

It’s not enough to make a dramatic difference to the prospects of an unemployed person finding work.”

Nonetheless, the report concludes that the wage subsidy is worth implementing, particularly if it is seen as a policy experiment from which to learn.

According to Bernstein: “While a subsidy is not ideal, if more jobs are created, it will prove that lowering the costs employers face when employing people is the key factor in creating many more jobs.”