THE government’s introduction of a wage subsidy for young workers is the culmination of five years of acrimonious debate. The idea of a youth wage subsidy was first mooted in 2008 by the international panel of advisers hired by the government to advise it on macroeconomic strategy. Funds were set aside in the 2011 budget to pay for such a subsidy.
However, union opposition has meant the necessary legislation has only now been passed. The unions have argued that the subsidy will not solve South Africa’s problem of extremely high unemployment. Supporters of the wage subsidy know this. The subsidy is aimed at addressing only one particular manifestation of unemployment: that the worst levels of joblessness are among workers under the age of 30 years (about 42%) versus workers older than 30 years (about 17%).
The reason unemployment is far higher among young workers is not that they lack education. Indeed, in terms of years of formal education, they are more educated than older workers. The reality, however, is that employers place little value on their formal education. What they value is work experience. So, older workers with even just a few years of work experience are much more likely to find employment than young workers with more years of schooling, but no experience.
It is this difference that the youth wage subsidy hopes to address. By making employment of young workers cheaper for the employer, it hopes to make up for their lack of workplace experience. At the same time, the wages of the young worker will not be reduced. They will receive the same pay as older workers, so claims that young workers will be paid "poverty wages" are false. The rules of the subsidy scheme allow employers to deduct from their monthly PAYE payments 50% of the cost of hiring first-time workers aged 18-29 who earn R2,000-R6,000 a month. This will cut the cost of hiring young workers, hopefully overcoming, in the eyes of employers, their lack of experience.
It is expected that, once in the workplace and afforded the opportunity to prove their competency, many young workers will keep their jobs even when their subsidy expires. Those who lose their jobs will still have benefited from their workplace experience. Their chances of obtaining a job in the future will have improved substantially.
Opponents of the wage subsidy argue that it is wasteful because the government will now subsidise employers who would have created new jobs anyway. This would be problematic if jobs were being created rapidly, but they are not. They are certainly not being created for young workers. So the claim that the subsidy is redundant expenditure does not hold water.
Opponents of the subsidy also argue that these cheaper young workers will displace older (unionised) workers. The Treasury rejects this argument, on the grounds that the high cost of retrenching existing workers will discourage their substitution by young workers. Moreover, businesses value older workers more than young workers, so do not consider them to be substitutes. This is why unemployment is so high among the youth in the first place.
The key disagreement between supporters and opponents is actually over the subsidy helping to create new jobs or not, or whether it will just redistribute existing jobs (and unemployment) more evenly between young and older workers. Central to this disagreement is the question whether wage levels matter in decisions by firms to create jobs. Supporters of the subsidy argue that lower wages will encourage firms to create more jobs. Young workers will therefore be given new positions, which will be able to be created because firms can pay young workers less than the prevailing wage rate (with the government paying the difference).
Opponents believe the number of jobs is fixed and so subsidised workers will necessarily replace existing workers. The unions cannot accept that lower wages will result in more jobs, because the corollary is that higher wages reduce the number of jobs. This implies there is a trade-off between jobs and wages. In other words, higher real wages for those with jobs can be achieved only at the expense of the unemployed, whom unions also claim to represent.
The youth wage subsidy will test how much wages really matter in firms’ decisions to create jobs. But, on its own, the subsidy will not be nearly enough to make a serious dent in South Africa’s unemployment. Unemployment can be substantially reduced only through a long period of sustained high economic growth. It is also necessary that such growth occurs mainly in the job-creating sectors of the economy. At the same time, the quality of our schooling needs to be dramatically improved so employers will come to value workers’ education and not just their experience.
None of this will happen quickly, but the youth wage subsidy is a worthwhile stopgap for young workers trying to find a job.
By Gavin Keeton
Keeton is with the economics department at Rhodes University.
Source: Business Day