"A better life for all": The case for a youth wage subsidy

By Matthew de la Hey

The South African unemployment rate is currently 25.2%. This means that 4.5-million people who had sought employment within the four weeks preceding the reference week were unable to find a job. This figure rises to 38% if those who have given up hope and have stopped looking — the “discouraged workers” — are considered. The statistic is even more bleak when one considers that one is deemed to be “employed” if they had work for one hour during the reference week.

71% of this unemployed workforce is comprised of people between the ages of 15 and 34. 60% of these do not have a matric certificate. It is clear then that we are faced with a startling issue of youth unemployment. In addition to being an indictment of the South African economy this poses a serious problem: a massive body of unemployed youth with little hope or opportunity and very little to lose is a dangerous thing.

There are a great number of things that contribute to this state of affairs. The most pertinent, it could be argued, is that the vast majority of these people are not sufficiently skilled to be absorbed by the economy. The catastrophe that is our education system has not equipped them to assume employment. The dire situation of education desperately needs to be fixed if this number is not to continue growing. This body of unskilled, unemployed and disturbingly often termed “unemployable” youth, however, cannot go back to school. We cannot merely write them off as an abnormal loss and hope for better outcomes in the future.

Another factor that contributes to unemployment is the stringency of South African labour legislation. The World Economic Forum’s Global Competitiveness Report for 2011-2012 contains some startling numbers. Of the 142 countries detailed in the report South Africa ranks very nearly at the bottom of a number of key indicators: 138th for flexibility of wage determination, 139th for flexibility of hiring and firing practices, 130th for the correlation between pay and productivity and 138th for cooperation in labour-employer relations. Much of this is no doubt attributable to the stranglehold that the trade unions have on our economy. This does not bode well for a country that operates in a global economy and makes it very costly for a firm to take a chance on a young worker.

One has to look at the problem of unemployment in this context. There are extraordinary disincentives firstly for companies to set up shop in South Africa and also for employers to take on labour. They are even more significant when faced with a lack of skills or with the uncertainty about an applicant’s skills as a result of the wide dispersion of quality in our education system. If one employs somebody and they do not prove to be satisfactory the process of letting them go is incredibly arduous. Furthermore, wage legislation makes the rates payable to a first time job applicant with no skills and no experience expensive. Why then take a chance on a young person and give them the opportunity to prove themselves and in turn to gain some experience?

So how then do we address this colossal challenge? What can be done to offer jobs at competitive rates to millions more in South Africa? It is likely that a multifaceted approach is required. Partnerships between government and the private sector need to be forged that will tackle the issues faced. Private enterprise, as a key driver of job and wealth creation, needs to be supported: it is vital that government promotes the growth of SMEs and encourages entrepreneurship.

One policy intervention that has been put forward is the implementation of a youth wage subsidy. In 2008 treasury published the recommendations made by the Harvard Group of economists in their document “A Growth Diagnostic for South Africa”. One of their proposals was the implementation of such a subsidy:

” … we propose a wage subsidy allowance for all 18-year-olds that they can use throughout their life to facilitate the school to work transition and to assure that the educational skills of the new cohorts do not deteriorate through a long period of unemployment. We will propose that during the probation period in which the allowance is used, employers be free to dismiss workers without any justification. This will encourage more experimentation and a more efficient matching of workers to jobs.”

It is important to note that a youth wage subsidy would not affect the wages received by employees: government would in effect cover a portion of the costs of employing a first time job seeker for a set period. At face value this seems like an incredibly sensible proposition: employers are incentivised to employ young people and give them a shot. It will also enable them to gain skills and experience that will be valuable in their careers: this is significant when one considers that just under 60% of the unemployed have never worked before. Workers who have been employed will find it easier to find subsequent employment.

The proposal is not without potential problems however: there is a risk that employers will exploit the system, using it as a means to gain cheap labour for a period before disposing of those whose subsidy has run out and employing more young, subsidised workers (“labour churning”) and that the influx of cheaper, subsidised labour will displace those currently in employment who are unsubsidised. The case for labour churning is, however, not very strong: firms will in fact have an incentive to retain labour whose productivity has increased due to training and the learning curve effect instead of employing and training new, inexperienced labour. The same holds for those currently in employment.

Government is behind the implementation of the subsidy and has approved it as policy: a pilot of the project was meant to start in April 2011. This was, however, stopped when Cosatu objected during discussions at the National Economic Development and Labour Council (Nedlac). This issue was recently thrust to the fore following the “reds vs blues” clash between the Democratic Alliance (in favour of the policy’s implementation) and Cosatu during the DA’s march on Cosatu House.

Why is Cosatu, a body supposed to be supporting workers interests, opposed to a policy that will help our massive unemployment problem? A policy that is expected to create 420 000 jobs and contribute to South Africa’s long term stability, growth and development? They argue that the potential negatives of the policy are too great and that it is “an attack on workers’ rights”. The real reason, I would argue, is that as an organisation it is mandated to protect the rights of its members. Thus a policy that would ultimately increase competition for its members is unacceptable.

Why then has the ANC not pushed ahead with the policy? Helen Zille said at a recent talk at Stellenbosch University that “Cosatu is the main roadblock in the road to job creation and redress for millions of South Africans.” She continued, saying, “It is now clear that President Jacob Zuma’s government is in office, but it is not in power. The truth is that Cosatu exercises a veto over government policy in education, labour and economic reform.”

The delay in implementation of the wage subsidy is estimated to have denied 301 788 young South Africans employment. The ANC needs to stand up and implement this policy, showing it truly is committed to “a better life for all”.

Matthew is an accounting honours student at Stellenbosch University with a keen interest in current affairs and political economy; an aspirant entrepreneur with the conviction to leverage the power of the private sector and business for good. He is a keen canoeist, fly-fisherman and hopeful author. Matthew is a 2012 scholar and interned at the World Bank in 2011 whilst on the South Africa Washington Internship Programme.