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A worthy cause

Feb 21 2013 07:27 *Geoffrey Chapman
students

Young people such as these university students could benefit from a youth wage subsidy. (Photo: Hannelie Coetzee, MCSA)

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THE youth wage subsidy was first suggested in the February budget speech of 2010.

I, for one, am happy that it finally might see the light of day - three years later - especially with the state of the nation address calling for support on jobs.

The objective of the subsidy would be to allow for more young people with no or minimal job experience to obtain employment in areas which could provide training, thereby gaining skills and experience.

This would then introduce them to the labour force and increase overall employment in the country. The fears of the young replacing the old are, therefore, misplaced as experience still counts for a lot.

Calculations on the effects of a wage subsidy find that about 1.6% of households move out of poverty with the implementation of the wage subsidy (based on $1 per day as the poverty line). Moreover, rural poverty and urban poverty also drop by about 1.5% and 1.6% respectively.

In addition, the decomposition of headcount poverty ratio by population deciles shows that poorer households, on average, gain more than richer households. In fact, all inequality indicators improve.

Although very important, the above impacts on the economy are secondary. The primary impact will be on youth employment: in other middle-income emerging market economies, nearly 80% of youth in the labour force were employed in 2007, whereas in South Africa the figure was only 53%.

Moreover, increases in youth unemployment are a result of labour force participants struggling to gain entry into the labour market, with 59% of the unemployed in 2008 reportedly never having had a job before (up from 51% in 1993).

Many young South Africans are thus caught in an unemployment trap due to their inability to find that first job – the labour market requires entrants to have experience in order to get a job, but they need a job to gain labour market experience.

Additionally, many of these young people remain unemployed for long periods of time (i.e. long term unemployment).

The situation is also not unique to the uneducated. A highly educated person is as vulnerable to unemployment as an uneducated one.

As the labour supply exceeds demand, the better educated are increasingly finding themselves among the unemployed.

Youth unemployment is a common trait among even advanced economies but in a country like South Africa, with a high skills mismatch, the inability of highly educated people to find work may be an indication of labour market rigidities.

Economic growth is necessary but not sufficient to create jobs. The South African economy was making history until 2006.

In the second quarter of 2006, South Africa’s economic prospects presented some outstanding facts:

• Real gross domestic product (GDP) growth averaged 4.9% in 2005 – the fastest growth rate since 1984.
• The current business cycle upswing was running 79 months long.
• The lowest inflation rates in 37 years were recorded in 2004 and 2005.
• Early in 2005, long-term interest rates registered a 35-year low of 7.3%.
• The budget deficit was estimated at 0.5% of GDP for the 2005/6 fiscal budget, the lowest in 25 years.
• The financial account of the balance of payments recorded an inflow of R98.4bn – the largest ever.

In addition to this already impressive list of facts, there were additional and important long-term factors that made the South African economy stronger than the typical emerging market economy.

These included a well-developed financial sector, no “original sin” in the currency denomination of inflows, world class corporations, a central bank with strong credibility, low budget deficits, low public sector debt levels and a successful political transition towards a democratic government.

Yet, for much of this period unemployment was rising, peaking in 2002/03 at above 30%. Although unemployment has dropped since the 2002/03 peak, it has fluctuated around its current level of 24.9% since about 2009.

The introduction of the youth wage subsidy might thus be the condition sufficient enough to help curb unemployment because it will help alleviate the core labour market rigidity – the cost of hiring a young, inexperienced (would-be) worker.

All the spillover effects of a higher employment rate among the youth, and otherwise, will subsequently be realised.

- Fin24

*Geoffrey Chapman is a guest columnist and trade policy expert at the SABS. Views expressed are his own.
 

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