Give youth wage subsidy a chance

There’s no easy solution to youth unemployment but a wage subsidy would be a good start. (Oupa Nkosi, M&G)

There’s no easy solution to youth unemployment but a wage subsidy would be a good start. (Oupa Nkosi, M&G)

A wage subsidy for young people is now in a Bill before Parliament. The idea was first proposed in 2010 and has been controversial since then, being vehemently opposed by some groups, notably union federation Cosatu.

Among the fears that have been raised are concerns that older workers will be replaced by subsidised younger workers, but much of the debate about the policy has been ideological.

As a result, sensible discussion about the potential impact of the policy has often been lost.

Meanwhile, youth unemployment (broadly defined) continues to hover around 50%, and above 60% for young Africans.

Following several years of inaction, in October this year the minister of finance submitted the Employment Incentive Tax Bill to Parliament for consideration.

It proposes tax incentives rather than direct wage subsidies to encourage firms to hire young workers.

Reflecting on lessons
Its submission provides an opportunity to reflect on lessons from inter­national and South African research on policies of this nature, and, in particular, a South African empirical trial to test the likely impact.

The country has many (often hidden) subsidies that discourage the hiring of low-skilled labour by making substitutes for it relatively cheaper.

Expenditure on capital (such as buildings, machinery and high-tech equipment) is subsidised by allowances for rapid depreciation as well as government-backed lending by institutions such as the Industrial Development Corporation and the Development Bank of South Africa.

Electricity is subsidised for several big firms. Research and development also receive beneficial tax treatment and soft funding from the government.

Among the employed it is the more skilled workers who are generally favoured by government programmes.

For example, subsidies are provided for learnerships (which generally require a prior level of skill or education).

Government subsidises universities
The government also subsidises universities.
Although none of these policies are inherently bad, they all make some factors of production (capital, skilled labour, technology) relatively cheaper, and these are often substitutes for low-skilled labour.

The question is: Why subsidise the use of these factors of production rather than low-skilled labour when a key challenge for the economy is to create low-skilled jobs?

Active labour market policies, of which a subsidy to labour is one, are common in both developed and developing countries.

They include tax breaks for firms for creating employment, mandated social security contributions paid by the government on behalf of firms, or government payments to companies for hiring. They are often temporary and may also be accompanied by other programmes, such as assistance with job searching.

Research that uses rigorous impact-evaluation methodologies has shown that the effect of this type of programme is varied.

In some cases wage subsidies have worked remarkably well, but only in the short term: in Jordan employment increased by 40 percentage points during the subsidy period but then fell to "normal" levels once the subsidy lapsed.

Lasting benefits
In other cases there have been lasting benefits, such as the Future Jobs Fund in the United King­dom, where participants were 27% more likely to be in unsubsidised employment two years after starting their funded job.

Another example is that of Turkey, where the number of registered jobs increased, although it was found that many of the subsidised jobs would have been created anyway. The impact of wage subsidies depends very much on labour market conditions in a country and the design of the programme, among other factors. The importance of context means that it is difficult to predict the effect of a wage subsidy in South Africa.

But research by James Levin­sohn conducted by the African Micro­economic Research Unit between 2009 and 2012 and involving four rounds of annual surveys, provided insight into how an intervention such as a wage subsidy may affect the way in which young people get into jobs.

The project tested the impact of a wage subsidy voucher on the success of a group of young people in gaining employment.

A firm that employed one of them was given a voucher and could then claim the subsidy (in this case from the project office at the University of the Witwatersrand).

Although this does not constitute a direct test of the proposed employment incentive, it comes close.

Testing the impact of the voucher
To test the impact of the voucher, the employment experience of a randomly selected group of young people was compared to that of a similarly sized group without vouchers but with otherwise similar characteristics.

About 4 000 young people took part in the experiment in Gauteng, KwaZulu-Natal and Limpopo.

The value of the voucher was capped at R833 a month, or half the monthly wage (whichever was lower), and could be claimed for six months.

The key finding is that those with vouchers were approximately 25% more likely to be employed one year after having received the voucher than those without vouchers — and were more likely to be employed two years later.

Invalid criticisms
The research also indicates that some criticisms of the wage subsidy are not valid:
• Of 605 firms asked if they would replace an existing worker with a less experienced one, 79% said they would not. Experience and existing relationships between employers and employees were considered too valuable to sacrifice at reasonable subsidy levels;
• Young people did not leave school or post-school educational institutions to look for jobs as a result of the voucher; and
• The voucher holders' jobs were not, in general, inferior to those of young people already employed by the firms.

The impact differed between firms of different sizes. Smaller firms were more likely, or more willing, to employ job applicants with vouchers than larger firms.

We can conclude from this experiment that if a wage subsidy similar in size to the one tested is introduced, the number of new jobs created is likely to be relatively low.

Based on the current rates at which unemployed young people get jobs — which are low, given the performance of the economy — about 88 000 new jobs would be created a year for 18- to 29-year-olds.

That is not a huge number relative to the total number of unemployed youth.

On the other hand, it is estimated that, for a subsidy of this size, the cost per new job would be about R25 000, which is considerably less than the cost of other government programmes designed to create employment, such as the Expanded Public Works Programme and learnerships, where rough estimates of the cost per new job are about R100 000.

According to this study and some supporting studies, subsidies increase young jobseekers' likelihood of being employed and increase the length of time young people remain in employment.

There is no easy solution to youth unemployment, but the introduction of such an incentive is an opportunity to experiment with, evaluate and improve policy design to create jobs.

Neil Rankin is a professor of economics at Stellenbosch University. This is an abridged version of an article published on Econ3x3.org, a South African online policy forum

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