South Africa, Politics

Analysis: The youth wage subsidy should not go the way of the nationalisation debate

By Osiame Molefe 16 May 2012

The subsidy ought to be debated on its merits and how it will affect the labour market, the unemployed and the economy. But much like other policy debates have unfolded in this country, it has been politicised, polarised and locked into thoughtless ideological corners. OSIAME MOLEFE attempts to have a calm look at the proposal.

No one can dispute that youth employment in the country is a significant problem. Cosatu and the Democratic Alliance, who shed blood over how to solve the problem on Tuesday, certainly don’t. The ANC-led national government also doesn’t disagree and in February 2011 tabled a youth wage subsidy as a way to tackle youth unemployment.

In his “counter-memorandum” to the DA’s memorandum, Cosatu spokesman Patrick Craven on Tuesday identified some of the contributing issues to, and symptoms of, youth unemployment.

He said: “Our education system is in a crisis and it sidelines 400,000 young people who do not proceed with their studies after writing exams every year. Today, 95% of the people who are unemployed have no tertiary education, 60% of the unemployed have no secondary education. As a result of this crisis, 68% of the unemployed have been unemployed for the past five years or have not worked (at all) in their lives.”

Craven went on to say the trade union federation was committed to ending youth unemployment but felt the subsidy would only exacerbate the problem. On this the DA disagrees.

Launching the party’s Youth Subsidy Now campaign last year, Tim Harris, deputy shadow minister of trade and industry at the time and now the shadow finance minister, acknowledged that the subsidy isn’t a silver bullet. He believed, however, that in the short term it was a step in the right direction.

The DA launched the campaign when it became clear that the R5-billlion youth wage subsidy finance minister Pravin Gordhan announced in his 2011 Budget speech was unlikely to be implemented by 1 April 2012 because the National Economic Development and Labour Council was still debating the policy. Nedlac’s labour component, particularly Cosatu, remains unconvinced that the plan would have the desired effect.

Under Gordhan’s proposal, the government would for two years subsidise the wages of all full-time workers in the formal sector aged between 18 and 29, earning below the tax threshold of R60,000 per year. The subsidy would cover up to R12,000 in the first year and R6,000 in the second for each qualifying new hire. Employers would could only claim the lesser amount and only for a year for existing, qualifying workers.

Treasury believed this plan would subsidise 423,000 workers, including 178,000 as a direct response to the subsidy. By treasury’s estimates, the net effect, after accounting for those who would “fall out” of the labour market when the subsidy ends, would have seen 133,000 new jobs created by 2015 at a cost of R37,000 per job. This was far more cost-effective than any of government’s direct job-creation initiatives.

Priced also at R5 billion, the DA’s proposal is similar but offers a smaller subsidy (R3,600 per year) to a larger group, including individuals who hire domestic workers, child minders and drivers.

At the time treasury conducted its research, the subsidy had a target a group of approximately 2.4 million unemployed youths, so the longer-term impact on unemployment would have been marginal.Treasury, though, positioned the subsidy as one facet of government’s multi-pronged strategy (led by the New Growth Path) to tackle youth unemployment. It acknowledged that the strategy would not address structural inhibitors to job creation, nor would it bridge the huge gap in skills between what the education system produces and what the work place requires.

It was pinned, really, on the hope that once exposed to the labour market, some of those subsidised will stay in their jobs as government implemented longer-term plans to fix education and the other structural problems. Treasury also suggested it might scale up the plan if proved successful.

Enter Cosatu to the fray. Contrary to the demagoguery it sends out into the public sphere, the trade union federation has good arguments for opposing the subsidy. The first is perhaps moral and poses a question of fairness and social responsibility. Corporate South Africa is sitting on R520.5-billion in cash. They could plough this into new investments, products, services and businesses that could create jobs, but instead they leave it sitting on the sidelines, citing adverse conditions and uncertainty.

Cosatu asks: Why should taxpayers subsidise businesses in times of adverse conditions and uncertainty when they have the means to subsidise themselves and create jobs? In this inclusive, united South Africa, is business a fair-weather friend?

To that corporate SA would say they’re answerable to their shareholders who expect risk-managed returns. I would not be alone in suggesting perhaps they’ve not applied their minds enough.

Welcoming the new era of considering the environment, governance and society in corporate strategies, decision-making and reporting, judge Mervin King said, “If done properly, organisations will have to take a new look at themselves and their business models. Through the process of integrated reporting they will be encouraged to explore new and potentially innovative opportunities in their products, services, processes and markets.”

Of course, corporate South Africa is but one of this economy’s employers. As identified consistently in UCT’s global entrepreneurship monitor, South Africa has too few small, medium and micro enterprises and too few of them employ five or more people.

Cosatu’s other arguments – that the subsidy would exclude youths from constitutionally protected worker rights and would see employers substitute experienced, expensive workers for cheaper younger workers – are also partially valid.

The Labour Relations Act, the Basic Conditions of Employment Act and other labour laws give effect to the constitutional provisions to protect worker rights. These provisions are largely aligned with international labour standards, put forward by the International Labour Organisation, which South Africa has been ratifying.

Even the DA recently supported South Africa’s ratification of the standard on domestic workers, so it might appear incongruent to suggest labour laws have created an impediment to growth. Labour laws inhibit growth as much as environmental protection laws do. They are another constraint around which successful, sustainable businesses have learned to work.

In terms of the youth wage subsidy proposal, treasury tried to address Cosatu’s concerns with hope and logic.

“There is little business sense behind replacing good experienced workers who have demonstrated their productivity and value to a firm with an inexperienced, young worker whose productivity is unknown simply to gain a temporary benefit. In addition, regulations around the dismissal of existing workers establish a legal framework that prevents this kind of substitution from occurring,” the department’s Confronting Youth Unemployment discussion paper said.

The working paper also said employers would still have to comply with sectoral minimum wages, so younger workers would still be protected.

From this the subsidy appears a red herring, but a useful one. It asks questions of government, business, workers and opposition parties. It shows that sacrifices need to be made by all to tackle what is a complex problem. It also shows that no single answer exists and that stone throwing and marching do little to create jobs. DM

Read more:

  • Confronting youth unemployment: policy options for South Africa [pdf], on National Treasury website.
  • The wage subsidy policy deadlock and South Africa’s youth unemployment crisis, on
  • Youth Wage Subsidy and the Spectre of a Two-tier Labour Market, on NGO Pulse.

Photo: An angry COSATU supporter throws stones during a march by the Democratic Alliance (DA) South Africa’s main opposition party in Johannesburg May 15, 2012. The march by South Africa’s main opposition party on the headquarters of leading union federation COSATU descended into chaos on Tuesday, with police firing tear gas to disperse crowds of rock-throwing protesters. About 1,000 members of the opposition Democratic Alliance marched through downtown Johannesburg in support of a government plan to subsidize the wages of young people in a bid to ease chronic unemployment among the unskilled youth.The group was met by angry COSATU members who blocked the streets, sparking a violent confrontation that had to be broken up by police.REUTERS/Stringer.


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