Analysts split over wage subsidy

The youth wage subsidy has been heralded by some as one of the boldest economic reforms introduced by the ANC-led government to date. But almost two years into the three-year, R5-billion programme, its real impact – much like everything about this contentious initiative – remains up for debate.

To what degree the incentive has meaningfully created employment is not yet known. But third-quarter job numbers for this year look good in spite of listless economic growth, which ran into negative territory in the second quarter of the year.

The latest Statistics South Africa data shows a dynamic labour market. Of a notable 712000 jobs created in the past 12 months, most – 314000 – were added in the informal sector. Next came 211 000 agricultural jobs, 100 000 from private households and a relatively low 87 000 in the formal sector.

In contrast, in 2014 the formal sector added many more jobs than the informal sector, and agriculture and private household jobs were in decline.

But the unemployment rate remains excessively high at 25.5%, with new jobseekers entering the labour market at a faster rate than jobs can be created.

The question is: What impact is the youth wage subsidy making?

It was initiated in response to an alarmingly high youth unemployment rate, which is seen as a ticking time bomb.

Unemployment is higher for younger South Africans and hovers around 50% for those between the ages of 15 and 24.

“Youth unemployment remains an issue. It is getting bigger all the time,” labour economist Andrew Levy said.

Where data is available, it offers little information about the true effect of the youth wage subsidy, known in its present form as the employment tax incentive. The government introduced the subsidy in January last year and it will end on December 31 next year, and be subject to evaluation.

But the tax statistics released recently by the South African Revenue Service (Sars) do show a rise in businesses accessing the incentive. The figure was R143-million in the first three months of its implementation from January to March 2014, but has jumped for the 2014-2015 fiscal year to R2.42-billion.

If every employee under the scheme qualified for the maximum incentive of R1 000 a month (see below), it would mean that 200 000 employees have benefited under the programme.

But it is assumed that not eve- ryone qualifies for the maximum and that the claims have benefited a great deal more than that. In February this year, President Jacob Zuma announced that an estimated 270 000 employees had been cov- ered by the scheme in 2014.

According to a 2011 treasury discussion paper, it was estimated that

over three years the youth employment scheme would subsidise 423 000 new jobs for young and less skilled people.

But the expected net job creation figure would be 178 000 because, even without the subsidy, firms would have hired young people anyway.

“Given that firms would have employed a number of young workers over the next three years without the subsidy, the total number of workers subsidised will be larger than the job creation that occurs as a result of the youth employment subsidy,” the document said. This would result in a cost of R28 000 per job.

Economist Roelof Botha said, even if the government subsides an employee’s gross salary by an average of 35%, the initiative has broadened the tax base and sala- ried worker, would sow their wages back into the economy through expenditure.

“So they are then maybe making a 65% return on their money. This is incredible stuff. It is one of the best economic ideas this government has had,” Botha said.

But a labour economist at the Free Market Foundation, Loane Sharp, argued that the cost of the jobs was very expensive. “Ideally a job should cost nothing. The cost should be covered by productivity.”

Precisely how many jobs have been registered under the scheme to date, and in which sectors they fall, is not yet known. But in answering parliamentary questions in August, the treasury said: “It appears that the bulk of the claims come from the wholesale and retail, financial and business services, manufacturing and agricultural sectors as classified by Sars.”

In a paper evaluating the effects of the tax incentive, the South African Labour and Development Research

Unit, based in the school of economics at the University of Cape Town, described it as “one of the most ambitious youth employment initiatives in the country’s history”.

Using quarterly labour force data from Stats SA, the unit found the labour absorption rate for youths between the ages of 18 and 24 had remained relatively stable at 30% for the whole of 2014.

This means the introduction of the tax incentive “had not resulted in a statistically significant change in the probability of young people finding jobs”, the paper, published in August, said.

Based on an analysis of Adcorp’s recruitment database for the year ending February 2015, Sharp indicated that 183 000 jobs were added under the new incentive since it was introduced.

Sharp said the recruitment firm’s database housed the records of two million people as opposed to the 90 000 analysed in Stats SA’s labour force figures.

“If I look at the database behaviour of those candidates, there are a number of undesirable properties,” Sharp said. “The youth who access that incentive have very low levels of secondary school performance. They really are being absorbed into sectors where they are on the borderline of decent work [often in the agricultural or mining sectors] … It’s an absurd situation where government is providing a subsidy for indecent work,” he said.

The South African Labour and Development Research Unit’s research found no evidence to suggest that the incentive resulted in an increased level of churning for youth in the labour market – the rate at which they find jobs and lose jobs.

But Sharp’s analysis of the Adcorp data does. “The database shows these employees typically stayed in these jobs for 18 weeks on average,” he said.

A normal attrition rate is between 3% and 4% a year, but this group displayed a rate of 22%, Sharp said.

And the churn is costly. Sharp said employers require an employee to remain in their position for 15 months to earn back the cost of recruiting, training and managing their performance.

The average cost to train someone is more than R31 000 and the aver- age cost to recruit them is R23 000.

“That’s a total of R54 000 before someone has hit the floor. If that person is only on the ground for 18 weeks, you never recover that … Yes, there have been jobs created, but people are now wary of these incentives.”

Asked whether the scheme was making a difference, Levy said: “For those people who have those jobs, it makes a difference. But, at the end of the day, employment has two aspects: supply and demand. Government has done nothing to stimulate demand in the traditional sense.”

The low-down on the youth jobs scheme

For an employer to qualify to claim the employment tax incentive, which came into effect in January 2014, an employee must meet certain criteria.

The employee must have been hired for the job no earlier than October 1 2013. The employment start date is audited by the revenue service to ensure claims are in line with legislation. The employee must have a valid South African ID (or asylum-seeker status, with valid permits), and must be between the ages of 18 and 29.

The incentive is only applicable to salaries from R2 000 a month upwards, but terminates at R6 000

a month. If there is no sectoral minimum wage, as legislated by the ministry of labour, the monthly minimum wage the incentive requires is R2 000.

The incentive takes effect through a lower amount of PAYE (pay as you earn) tax owed each month. But eligible employees can only benefit from the incentive for a maximum of 24 months.

For a qualifying employee earn- ing R2 000 a month, the employer can claim up to 50% of the salary back for each month in the first year of employment, and 25% in the second year.

For an employee earning between R2 001 and R4 000, the employer can claim a R1 000 incentive a month in year one, and R500 a month in year two.

For an employee earning between R4 001 and R6 000 (the maximum), the calculation is more complex. In year one, the monthly incentive calculation is R1 000 minus 0.5 x (monthly pay minus R4 000), and in the second year it changes to R500 minus 0.25 x (monthly pay minus R4 000). So if, for example, an employee is earning R5 000, this would mean the employer can claim R500 a month in the first year, and R250 in the second year. – Lisa Steyn

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