by Monique Broumels

The Youth Wage Subsidy

The youth wage subsidy has been a hot topic in the news recently

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The youth wage subsidy has been a hot topic in the news recently. Why has the issue of youth unemployment, as opposed to the problem of unemployment overall, come to the fore now and why has it become an issue that has been embroiled in politics? It is a scheme that has been in the planning for over a year but is only one part of an approach to alleviate youth unemployment. 

Why is youth unemployment a problem?

The National Treasury published a discussion paper in February 2011 titled, “Confronting Youth Unemployment: Policy Options for South Africa”. The paper showed that unemployment in South Africa was especially problematic when only 12.5% of youth in this country were employed, while 40% were employed in other 
developing countries. 

‘Youth workers’ are identified as those between the ages of 15 and 25 years old. At the time the discussion paper was published, 86% did not have tertiary or further education, while two-thirds of those youth had never been employed. 

Furthermore, there is a lack of jobs to go around in a depressed economy that is weighed upon by international affairs. The problem of youth unemployment, according to the paper, has 

worsened over the last two years a a result of the recession. Employment of 18 to 24 year
olds fell by more than 20% (320 000) between December 2008 and December 2010,
compared with an overall decline of  6.4%. The unemployment rate among those under the 
age of 25 years old is about 50% , accounting for 30% of total unemployment. Including those aged 25-29 years old, adds another million to the unemployed.

So it is clear that within SouthAfrica's unemployment problem that youth unemployment  accounts for over a third of it. Also, because of the problems that face youth in gaining jobs (set out below), it is unlikely that if the problem of unemployment is not addressed at the level of the youth that job prospects for those people are unlikely to improve. 

The paper acknowledges that while the youth wage subsidy is an important and significant part of alleviating the problem of unemployment, it is really only a growing economy that can sustain jobs and allow for job creation.

This is an important aspect but it is also not an aspect of job creation that stands alone. “A better educated and more highly skilled workforce is the most pressing long-term priority for the economy” the paper points out. 

Problems that youth face in finding jobs

It becomes clear that two of the biggest problems facing youth employment is that they lack the skills to become employed and, secondly, that they lack experience in the workplace. Employers view inexperienced skilled workers as a liability, the paper reported, and neither is education a replacement for experience. 

The Annual National Assessment results of 2011 showed Grade 3 learners scoring an average of only 35% in literacy and 28% in numeracy tests. This low quality of school education in South Africa makes employers dubious of youth employees’ capabilities. 

In addition, employers consider the entrance level wages for youth as being “too high, relative to the risk of hiring inexperienced workers”, the Treasury paper noted, due to the cost of firing and hiring people being expensive. 

A third, and perhaps most disturbing, fact is that youth and first-time job seekers continually find themselves unemployed. This means their exclusion from the economic functioning of the country causes increased uneasiness while their morale and dignity are chipped away so that they are discouraged from looking for work
at all.

What the youth wage subsidy proposes

For those who have finished their schooling and now have to find a job, the government has proposed implementing a youth wage subsidy that would subsidise 423 000 new jobs for young and less skilled people aged between 18 and 29 years old. It would cost R5 billion in tax expenditure over three years.

The wage subsidy would reduce the financial cost to firms hiring youths without knowledge of their productivity and, at the same time, make the training of those employees more affordable. 
In addition, as the Treasury research paper suggested, the wage subsidy would encourage job seekers to become more active in their 
job search. 

In his Budget Speech earlier this year, Finance Minister Pravin Gordhan announced a R207 billion injection into the education sector for 2012/13, which would hopefully increase future employers’ faith in the education of 
young employees.  

“The youth subsidy will not, in itself, solve unemployment among young South Africans. It is, however, a useful measure that will assist young, inexperienced workers gain work experience, access decent jobs in the formal sector and improve their employment prospects in the long-run,” the discussion paper states.

Skills training programmes are still equally important in order to alleviate skills shortages in the economy and  the National Skills Development Strategy still works to ensure providing responsive education and training implemented by the National Skills Fund and Sector Education and Training Authorities which have been effective since 2000.

The subsidy would insentivise companies to formalise positions (in order for them to make use of the subsidy) which in turn, would work towards the government's aims to create more jobs in South Africa.

Arguments around the subsidy

One of the complaints about the youth wage subsidy has been that it will severely affect the taxpayer. Indeed, having to support a large percentage of unemployed citizens is problematic as well. 

As poverty and unemployment increase, so must social spending on these people in the form of unemployment funds and other social grants or, as the government has been forced to do, use taxpayers’ money to create what the Free Market Foundation (FMF) calls ‘pseudo jobs’. 

While the FMF is correct on the fact that these jobs are not sustainable, its suggested policy – in which unemployed or first-time job seekers are exempt from actual labour laws after six months, to improve their attractiveness to small and medium enterprises (SMEs) and other employers – seems fraught with extraneous complications for both employees and policy-makers. 

Furthermore, it does not necessarily pose a solution to the problem of someone hiring an unskilled person to perform a job, since this would still cost the employer in resources and time.
Instead, viewing the workplace as a training ground that is incentivised by financial assistance from the government means that SMEs and other companies are investing in the youth and first-time employees who, if they do not continue at that company, have at least the experience and skills that would make them more attractive potential employees elsewhere. 

In countries of the Organisation for Economic Co-operation and Development, it is common practice, if not policy, for school-leavers or students of a particular training to gain work experience.
As with everything, there will be loopholes where employees may gain windfalls by such a system, but implementing the youth wage subsidy means – as Gavin Keeton of the Economics Department at Rhodes University points out in Business Day – that we are doing something to alleviate the problem of unemployed youth. 

Moreover, it is giving people a chance at dignity and self-belief that they can be part of a functioning economy. 

A political issue

The relationship between the Congress of  South African Trade Unions (Cosatu) and the ANC, with all its intricacies, politicsweb writes, has come to public attention ever since Cosatu's strike against labour broking and the e-tolling system this year. 

However, the ANC, in the interest of national employment, went ahead and sanctioned labor brokering, despite Cosatu's views on the matter that it didn't provide formal and secure working conditions for workers. 

Cosatu's  take on the youth wage subsidy is that it will not put an end to the unemployment problem and that it will form an unbalanced youth market where older workers may be jeopardised in the process of this implementation.

Talks with the National Economic Development and Labour Council (Nedlac) have been   consistantly stalled due to Cosatu opposing the move. While Ebrahim Patel, Economic and Developmet Minister said in the second week of June this year that talks with Nedlac will be sped up, there is also the fact that the re-election of heads of the ANC is coming up in September and so taking decisions that might upset supporting factions might be put on hold. 

The Democratic Allience (DA), on the other hand has pointed out that this stalling of instituting the youth wage subsidy is not helping anyone. They feel that the subsidy would significantly benefit young unemployed people over the next three years and that the subsidy is the best way to lower the costs of  firms employing youth without influencing the amount of employers pay and the working conditions that they provide for their employees. 

The DA also maintains that labour laws protect older employees since it is illegal to fire older employees in order to employ younger ones. 

The DA has also run a youth wage subsidy pilot project, called the Work and Skills Programme since 2009 which has given work experience to 2966 youths. With its worker retention rate of 70% that is 2076 young people that have remained employed because of the scheme.

Monique Broumels

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