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.

AFRICA IS STILL COLONISED

In the beginning; well actually in 1652, the Dutch, under the auspices of the Dutch East India Company [VOC], established what was meant to be a mere refreshment station in Table Bay, Cape Town. This simple move, under the command of Jan Van Riebeeck, set in motion a plethora of consequences for Africa and her people that would have an everlasting and devastating effect that will almost certainly never be shaken off.

What ensued and lasted an effective 342 years to 1994, was a calamity of magnum proportion. During these three and a half centuries, Africa and her people were deeply scarred by epic violations to their dignity, sense of self and humanity. Between colonisation, slavery, systemic racial exclusion and downright thievery, Africa and Africans were left with little more than sheer resilience and determination to survive.

Continental Europe with her warring ways has always been beset by protectionism, competition and nationalism. The 17^th century in particular was a time in which European imperial powers Britain, France, Portugal and the Netherlands competed profusely with and amongst themselves for trading stations across the world. This epoch in history is characterised by accelerated acquisition, through naval warfare, of colonies in Africa, Asia and the West Indies.

This was a period in time dominated by mercantile economics. The mercantilists believed that the only source of wealth for a nation was the amount of Silver and Gold bullion it possessed. Mercantilist were firmly of the view that one nation could only prosper at the expense of another. This totalitarian view emanated from the belief that there was only a given amount of Gold and Silver in the world and as such its possession would give one nation superiority over its rivals.

For this reason, colonies were sort not only as destination markets for industrial goods produced in the colonising nation, but also as potential sources of cheap (exploited) raw materials and mineral resources. One can thus infer that Colonisation was as important for politics as it was for economics, which have never been mutually exclusive. The imperialists struck Gold, pun unintended, when they decided to colonise Africa.

Between 1652 and 1700 the refreshment station in the Cape had evolved to a crop farming settlement for its Dutch inhabitants. Slave labour was brought in from East Africa and Asia to help expand and accelerate the development of this colony. Crop failure, due to the intensity of wheat farming and poor farming techniques necessitated stock farming. This resulted in an 80 year expansion into the interior, under the stewardship of Simon van der Stel. This expansion culminated into a 100 years of frontier wars when the Dutch (Afrikaners) encountered the Xhosa to the Eastern cape in 1770.

Then came the British in 1795 during the Napoleonic Wars when France invaded the Netherlands and Britain militia secured the Cape for strategic reasons. The arrival of the British in South Africa amounted to a three dimensional dichotomy. Firstly, they had to deal with the Afrikaners who considered themselves the overlords of the Land by racial and cultural superiority (racism). Then there were the Khoi and the Blacks who resented and resisted the Afrikaner encroachment and violation of their liberties. Finally, you had the British who thought themselves entitled by right of legal acquisition and conquest. In the end, the British imposed their language, institutions and ideas on all and sundry.

Over the next 100 years Diamonds and Gold would be discovered, Black people would be consigned to live in compounds (hostels), the pass laws would be enacted and the Anglo-Boer wars would decisively lead to a British modelled Union of South African by 1910. During this time the fortunes of the indigenous Blacks and Khoi would only worsen. By 1948 the Afrikaners would officially take over as the Government of South Africa and adopt the policy of Apartheid, which was largely based on Slavery, to condemn black people to permanent labourers with little education and scant prospects of mainstream economic participation.

The results? Unemployment, Poverty and Inequality. Today’s abysmal situation is a direct derivative of systemic race based exclusion of Black People from meaningful economic participation. It is partially because Blacks were forced to work as unpaid peasants in farms that their great grand children remain enslaved in farms today. It is precisely because they were excluded from enterprise and mining opportunities that their great grand children remain illiterate and serve as cheap Mining labour.

Black schools were of inferior quality way before 1994, that they remain so is an entirely different issue. Most South Africans remain unemployed because they have no education, are inappropriately skilled (a structural defect caused by the mineral-energy complex predating 1994), they remain unsheltered because their farms were stolen from them and they sort refuge and employment in urban centres like Johannesburg. They struggle to participate meaningfully in the economy because it remains systematically ‘Anglo-Boer’ and Black people are unequipped, under-skilled, under-educated and functionally displaced from partaking in it.

That English, and to a lesser extent Afrikaans, is the main medium of instruction and the only “real” official language is bizarre in a country whose citizens, by orders of majority, are non-English or Afrikaans speaking. Take note! Neither Brazil, Russia, India nor China (BRIC) are English speaking nations. They communicate in languages spoken by the majority of their people, this is inclusion! African languages are superficially considered as official languages. To add salt to injury, Black people have been indoctrinated with an inferiority complex to make fun of those with poor command of English. Really?

Today, colonisation wears the mask of Foreign Direct Investments but still exudes all the hallmarks of nationalism. Our complicit African Governments are only too excited to hastily sell off our mineral resources at next to nothing and condemn our people to unwarranted hardship and suffering. This in exchange for meaningless remittances in the form of social grants! Africa remains little more than a big fruit and veggie land and a puffed up pick and shovel site. Our countries are constructed as mining to port nations with no substantive industrial development or enabling infrastructure due to dismal Government and governance.

Ironically, not much has changed since the days of political colonisation. Today is scarcely different to the time when Cecil John Rhodes established De Beers as a Diamond mining monopoly based in Kimberly and then went on to establish Gold Fields in the Witwatersrand. All profits in the form of dividends were repatriated back to colonial nations and Africa was merely a market for European manufactures. Nothing has changed.

Conglomerates make runaways fortunes for their international shareholders (nothing wrong with that), pay measly taxes to our Governments, induct a few Black Bourgeoisie as Directors (divisive), beneficiate our resources in western nations (exploitative) and then sell them back to us at profits that outweigh the taxes we charge them (condescending). The consequence is that they have the cushy jobs while Africans remain diggers and riggers! In the long run African countries become permanently dependent on the flow of FDI and remain at the mercy of colonising nations.

Many couldn’t have foretold that China would be the 21^st century colonial power of the world. Colonising not by military conquest but by sheer economic force! This is the new face of colonisation. Many false prophets have suggested, as a remedial measure, the forceful and violent seizure of mines and farms. This would be tantamount to the same sort of economic suicide that stifled the nation during the administration of the Afrikaner Government.

We will not exit this abyss by dissuading investors from making appropriate investment with prospects of competitive returns in Africa.  Solutions to our problems are many, they are complex and they require an integrated approach. A good place to start is by;

a.    Changing the incentives for mineral exploitation such that it becomes cheaper to beneficiate in South Africa and sell to the rest of the world. A super tax on raw minerals is a sensible instrument with which to achieve this.

b.    Incentivising secondary sector (Manufacturing) Entrepreneurship through a cohort of support mechanisms (see the article on Cohesive Entrepreneurial Support).

c.    Aligning the social grant systems to academic performance, progress in schools and even voluntary (no-pay) employment. In the likeness of Progressa in Mexico.

For now, let us not be naïve. Africa is still colonised!