Youth Wage Subsidy [Disembowelled]

There has been so much brouhaha surrounding the youth wage subsidy that I considered sitting this one out instead of commentating. But the escalating insanity around some arguments has made it difficult not to weigh in on the debate. Besides, I believe I have quite a unique vantage point as a small and big business owner, economist and black youth.

An upfront disclaimer is in order; I am a big advocate of economic intervention where large systemic market failures prevent the market mechanism from operating efficiently. South Africa has a litany of such market failure. Everything from inequality to jobless growth and cronyism is indicative of malignant defects to the market mechanism.

Wage subsidies, for all the noise, are neither new nor peculiar instruments used to incentivise employers towards employment choices, which they otherwise would avoid. As a matter of fact, the current Learnership programmes run by various SETAs could be said to be employment subsidies.

The employer can claim a tax incentive of between R30 000 and R60 000 for each learner in a registered Learnership. Furthermore, the SETAs often pay small stipends (between R5 000 and R40 000 per annum) to each learner. Since Learnerships are targeted at people between the ages of 16 and 35, one could infer that this is the original youth wage subsidy. Learnerships enjoy higher per capita funding than the proposed youth wage subsidy, not to mention the fact that employers (not all tax payers) provide the funding for this.

So why then is there so much noise about the youth wage subsidy? Opponents argue, unconvincingly, that it will have a displacement effect on current labour markets and may lead to deadweight loss. The displacement argument purports that employers will dismiss or marginalise existing employees to fill the workplace with subsidised employees, increasing their profits and causing untold economic mayhem.

This argument is mostly poor, particularly in the South African context where workers are protected by motes for laws, that it is difficult to believe it to be premised on sound economic rationale. The risk of such churning is negligible and can be mitigated by design of the subsidy. Deadweight loss, on the other hand, occurs where the employer gets the benefit of the subsidy even though they would have employed the subsidized anyway. Seeing that the economy has shed 1.5 million jobs in 3 years, this is a doubtful outcome.

A more sound argument is one which posits the question; “why should the government attempt to entrench cheap labour in order to subsidize inefficient businesses”? Could this end up in a scenario where you and I are subjected to higher taxes to finance what is inevitably a futile experiment with the usual gamut of monitoring institutions and compliance requirements?

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After-all, by their own admission, National Treasury does not believe that a youth wage subsidy will solve the youth unemployment problem in South Africa. They concede that youth unemployment is complexed in low education, low economic growth and a severe defect in the construct of the South African economy. So does this mean we are playing petty politics and speculating ever so generously with the national purse?

Proponents of the subsidy, on the other hand, postulate that employers are not employing youth because “entry level wages are high relative to the risk of hiring these inexperienced youths”. By implication, a subsidy will reduce risk and correct this market failure. This group sees a wage subsidy as a means of reducing the cost of employment relative to non-targeted groups. As such, companies will demand more of such subsidised labour and would incrementally employ younger people currently hindered from entering the labour market.

This seems like a rational argument enriched with neoclassical economic connotations; a sure favourite amongst many an economist. Take a look closer and you see that the subsidy is R12 000 over 2 years OR an average of R500 per month. It seems rather a pittance to entice business, particularly big businesses, to employment young people. The subsidy is actually a tax credit and not a cash incentive, meaning it will not confer any cash flow benefits to small businesses.

So who is this target at? It seems rather inappropriate for both Big business (too little) and Small business (no conferred advantage). Small businesses generally don’t like complex incentive programmes they can’t make heads or tails of. Take a look at the complexity around Learnerships and you see why they aren’t the runaway success they were originally envisaged to become.

What the proponents do not seem to consider in their argument is the fact that even when labour is free, it comes attached with costs. What is the point of having subsidised employees if this will end up costing you more in training, babysitting and administration? Suffice to say that when factories lie idle and machinery gathers dust, employers cannot create employment at any given wage. It will not be enough to subsidise labour when the domestic producers are ravaged by cheaper imports from countries with little regard for international fair labour regulations.

Perhaps if there is R5 billion to be availed in support of youth employment initiatives, it should take the form of a grant to youth owned co-operatives? You can couple this with a personal tax incentive for Big business CEOs to provide mentorship to such co-operatives. In this way, you can create massive youth entrepreneurship and provide concomitant support for it.

At R500 000 per co-operative, you can create a minimum of 10 000 new youth owned businesses and a minimum 50 000 new self-employment jobs. What’s more, a rider could be included to insist that these co-ops must be in labour intensive sectors or use labour intensive production methods. This to me seems the more sensible gamble with tax payer money. In the main, both arguments for and against the youth wage subsidy are neither here nor there.

Personally, after much agonising over the issue and synthesising the economics behind the politics, I'm convinced that as it stands, the subsidy will not work to create the projected levels of employment. For the subsidy to work, the benefit has to be a cash incentive targeted at small businesses with little admin required. Moreover, the subsidy has to be conditional upon marginal increases on the unit labour force to avoid churning (displacement).

It is not so much that the idea is inherently bad as it is that it is premised on the wrong economics.