Since 1994 South Africa has seen the establishment of democracy and a stable macroÂeconomic environment, and reintegration with the world economy. All of these accomplishments would tend to increase employment.
Add to the mix that under apartheid black people could not own many types of businesses, were subject to an intentionally second-class education, could not live where most businesses were centred and could not advance within firms and it would have seemed a sure bet that the unemployment rate at the transition to democracy (about 15%) would have plummeted. Instead, it has almost doubled.
Unemployment has costs –some measurable, others not. Unemployed South Africans represent unrealised potential economic growth. Indeed, if the fraction of the population that was employed rose to the level found in six comparable countries, per capita GDP in South Africa would rise 48% –a figure that dwarfs government’s goal in the accelerated and shared growth initiative for South Africa (Asgisa) of an increase of 38% by 2014.
Unemployment also imposes less obvious costs. Workers who are not employed are not gaining valuable on-the-job experience that would contribute to future productivity. Perhaps, most importantly, unemployment contributes to the social ills that accompany loss of hope. These include crime, disengagement with the political process and a lack of investment in oneself. For all these reasons and more, unemployment needs to be addressed.
As part of a team of international economists advising government on policies to enhance economic growth, we have looked carefully at South African unemployment data. Unemployment affects all groups of society, but it is especially prevalent among the young and those with only a matric or less. Less obviously, it turns out that once one is in the formal labour market, one tends to stay there. One might bounce from job to job, but the real trick seems to be getting that first job.
Here is our proposal: implement a targeted wage subsidy to facilitate the school-to-work transition and couple that subsidy with a brief probationary period during which no-questions-asked dismissal is permitted. This ambitious policy would give every South African a magnetic card upon turning 18 years of age. The card would have an initial balance of R5Â 000 –about half the annual income of a new employee with a recent matric. That balance could be used to pay up to half of the cardholder’s wage at any registered firm. When the balance on the card hits zero, the subsidy is used up.
If upon turning 18 and receiving the subsidy card, the cardholder stayed in school, the balance could accrue interest as an incentive to get more education.
For the first 10 weeks of subsidised employment, the employer would have the right to dismiss the worker. After the 10-week probationary period, standard employment security regulations would apply.
Given the large variation in the quality of secondary schools, it is hard for a firm to know if a recent matric is likely to be a good employee. This policy lets firms (and workers) experiment. From the employer’s perspective, young workers would be “half off”. If the worker was paid R800 a month, the employer would pay R400 and the other R400 would be paid by drawing down the balance on the subsidy card.
Of course there is a danger that firms will “game” the system by letting employees go just before their 10 weeks are up, only to replace them from the pool of subsidised workers. But it is not clear that it would be in an employer’s interest to forfeit their investment in on-the-job training; and in any case, the department of labour could identify firms in the programme with high turnover.
What would a policy like this cost? Implemented at a national level (and unemployment is a national problem), the cost would be in the range of R4-billion a year: expensive, but the social cost of doing nothing is also enormous.
In the medium to long term the only solution to unemployment is sustained economic growth, driven by investment in new capacity in tradable goods and services. But we believe this growth strategy has to be supplemented in the short term with additional measures that tackle the problem head-on. A wage subsidy targeted at recent school-leavers is designed to do just that.
James Levinsohn and Dani Rodrik are professors at the University of Michigan and Harvard University respectively in the United States and members of the advisory panel for Asgisa