The youth wage subsidy: a closer, not very pleasant look

By Paul Berkowitz 19 August 2011

The Centre for Development and Enterprise recently released a summary of its latest round-table discussion. Entitled “Jobs for young people: Is a wage subsidy a good idea?”,  it discusses the pros and cons of the youth wage subsidy to be launched as part of next year’s national budget. PAUL BERKOWITZ weighs up the debate.

The CDE is known for its pull-no-punches approach to the unemployment crisis and the executive summary of its latest round-table discussion doesn’t disappoint.  From the first paragraph, the shocking statistics on youth employment hit you like an Eskom-induced cold shower on a Johannesburg winters day: 72% of South Africa’s unemployed are younger than 34 years old.  The unemployment rate of under-25s (49%) is twice the national average (25%).  Only 50% of job-seekers between 15 and 24 end up finding jobs, compared with an average of 80% in other emerging economies.  Most of us have seen these numbers, or variations, over the last few months. They still have the power to make your chest tighten and to send involuntary shivers through your body.

The treasury will introduce a youth wage subsidy in the 2012 national budget. It is aimed at workers aged 18 to 29 and will subsidise a portion of their wages for up to two years. The subsidy would be paid to registered employers and it’s estimated 133,000 new and sustainable jobs would be created over three years.  With R5 billion allocated to the subsidy over the next three years, each new job will cost R37,000.

These figures make the subsidy sound like a bargain when compared to existing alternatives.  The Expanded Public Works Programme creates “job opportunities” – short-term low-wage jobs which aren’t sustainable – at a cost of R100,000 a “job”. Support for the automotive sector comes in at just under R20 billion a year. Depending on how creatively you calculate the benefits of the subsidy to the industry (i.e. by including jobs higher up and lower down the supply chain), the cost of subsidising each job is as low as R60,000. That is R60,000 a year, every year to subsidise existing jobs.

The rationale behind the subsidy is simple. Young people have no work experience and few skills. Add to the mix the rigidity of existing labour laws (which make it very difficult and costly to fire non-performing workers, you know the drill) and it’s clear why many businesses are reluctant to hire young unskilled people. By making it cheaper to hire young workers, they will be more attractive to employers and will gain the necessary skills and experience over the two-year subsidy period. Once the subsidy falls away, they’ll retain their jobs because of the increased value they add.

Not surprisingly, the subsidies have met with stiff opposition from organised labour.  Cosatu boss Zwelinzima Vavi declared “we have always objected to a wage subsidy”, while Patrick Craven, Irvin Jim (Numsa) and the Young Communist League respectively described the subsidies as “leading to the creation of…super-super exploited workers”, “an insult” and “a narrow and liberal interventionist response”. 

These subsidies have been mooted by the ANC since 2007 and they’ve been shot down by its alliance partners whenever they’ve been raised. Cosatu rightly fears the subsidies will result in downward pressure on its members’ wages and has succeeded in keeping subsidies off the agenda for the past four years. In recent months it’s split its focus and chosen to expend most of its energy on having labour brokers banned. At the same time the economy has continued to haemorrhage jobs and it looks like the ANC is done with appeasing labour on this issue. 

The wage subsidies are going to happen. Will they make a difference? The CDE isn’t convinced. It points out that, when the subsidy was originally proposed by a group of Harvard economists, “it was deemed ‘essential’ to link the subsidy to the creation of a probationary period during which subsidised workers could be dismissed on a ‘no questions asked’ basis. In other words, reforms to labour legislation would need to be part of the overall package”. The CDE endorses this view, and points out (correctly) that 133,000 new jobs over three years barely addresses the problem. Make it easy to fire these new workers, says the CDE, and employers are likely to hire them in far greater numbers.

Good luck on that one. Labour market reforms were proposed in a 2005 discussion document penned by then-deputy finance minister Jabu Moleketi. Among other things, the document suggested a two-tier labour market with easier hiring and firing of young employees. The response from Cosatu was so hostile the document was shelved.  Moleketi resigned his position in 2008 following Mbeki’s resignation and was swiftly replaced by Nhlanhla Nene. His political career seems to be in limbo now and some believe the still-born discussion document sealed his fate. 

We’re in a depressingly familiar position. Attempts to open up the labour market to the young unemployed are almost entirely thwarted.  What progress we have achieved, after a five-year back-and-forth debate, has been watered down to the point of a token gesture.  We may create 133,000 jobs over the medium-term, during which time at least 10 times that number will enter the job market. The jobs created may turn out to be the cheapest and most sustainable government has created over the last decade. That’s a bit like recognising Sporty Spice as the most talented member of the Spice Girls; it’s patently true, but it’s not setting the bar very high. DM

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Photo: Reuters.


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