YOUTH WAGE SUBSIDY - ANC ARGUMENT

South African unemployment is highly concentrated among the youth, which is indicative of a general reluctance among firms to employ youth labour market participants. Within the context of structural shifts and skill-biased technical change, the high rate of youth unemployment is closely associated with educational attainment (both the quantity of education and the quality or appropriateness of qualifications are concerns), skills, and work experience among the youth. A supply-side factor is the effectiveness of job search strategies among the youth.

Many youth may have insufficient educational attainment, due either to early exit from the schooling system or to poor quality and coverage of instruction in basic literacy and numeracy. Those who leave school early are hugely disadvantaged, but even those who are better qualified face poor prospects relative to more experienced adults. Several analyses have shown that young people are entering the labour market at an earlier age but with higher education levels than in the past (Branson 2006; Pauw, Oosthuizen, and van der Westhuizen 2008).

In an economy where labour demand is constrained and has shifted toward higher-skilled labour, competition for entry-level jobs is fierce; thus, a matric (the qualification obtained in the final high school year) may simply no longer be enough to guarantee employment.  All of this raises the question of whether the youth have appropriate skills or sufficient experience relative to the needs of employers. The skills-mismatch hypothesis encompasses issues around the quality and appropriateness of education, as well as the trade-off between general versus job-specific experience or skills (Burns 2008).

Quality of education is a major concern in South Africa. Four out of five school leavers are considered functionally illiterate (i.e., they lack the language skills required to be successful at tertiary institutions) and 60 % have inadequate mathematics and science skills as they exit high school (Mlatsheni 2005). Kraak argued that this “perceived poor quality of South African schooling (particularly in the former African school system) serves as a major disincentive on the demand-side for employing large numbers of first-time entrants to the labour market” (2005, 31).

Closely related to the quality issue is the appropriateness of courses offered or, indeed, selected by students. Constant evaluation of school curricula and proper career advice to students are crucial.  Education is, of course, not the only means through which skills are obtained. Early labour market experience in the form of part-time employment eases the transition from school to work, assists youth with choosing career paths, and instils work ethics considered desirable by employers (Burns 2008).

Employers faced with high labour costs and labour market rigidities may become more selective in their hiring decisions by placing greater weight on prior experience. It is for this reason that young jobseekers are disadvantaged: Three-quarters of the unemployed youth surveyed in the LFS 2007 (Stats SA 2008) reported that they had never worked before, compared with less than half of unemployed adults. Once again, there is a racial dimension to this factor. Lam, Leibbrandt, and Mlatsheni (2007) documented large differences in the school-to-work histories across race groups in South Africa’s Western Cape Province. By age 20, only 20 to 30 % of Africans had ever done any paid work, compared with close to 90 % of whites.

Anderson, Case, and Lam (2001) found similar low work rates among African youth in the rest of South Africa. The implication is that to the extent that employers might be willing to hire youth, white youth will be at a significant advantage due to a higher incidence of prior job experience.

Limited work experience may also reflect ineffective job search strategies of the youth. Burns (2008) argued that material job search costs in South Africa are high, due to the large geographical distances between areas where employment opportunities mostly exist and areas where people reside. In particular, the youth are vulnerable given their lack of mobility and limited resources. Many youth rely on word-of-mouth from friends and family to learn about job opportunities. Successful job search through such social networks requires good-quality networks, which places those youth living in isolated areas or in communities with limited attachment to the formal employment sector at a relative disadvantage.

The health status of jobseekers and their family members is a further important consideration. For instance, the high prevalence of HIV/Aids among the youth may contribute to unemployment, since poor health impedes active job search. Some people may also be unable to take up employment because they need to care for sick or elderly family members (Burns 2008).

Once again we should ask ourselves whether a youth-targeted wage subsidy is the appropriate policy tool to address youth unemployment. In well-functioning labour markets, educational qualifications signal youth labour market participants’ productive capacity, especially where participants have limited work experience. When these signals are weak, the price of labour would normally adjust, such that firms would still provide individuals with an opportunity to reveal their productive capacity.

The problem in South Africa is that these processes do not seem to be working for young people. The market failure, therefore, lies in the fact that individuals are unable to properly signal their productive capacity to firms and are unlikely to be given opportunities to do so by risk-averse employers. Employers thus look for signals elsewhere, placing particular emphasis on past work experience and networks, leaving many youth at a disadvantage.

A highly regulated labour market contributes to employment costs and the risks associated with hiring youth labour market participants.  Wage subsidies may be effective in allowing young people to access the labour market for the first time, because the subsidies compensate firms for the risk associated with being unable to identify the productive capacity of prospective employees. However, a wage subsidy alone may not be adequate. For example, firms may continue to be unwilling to employ new labour market entrants, even with the subsidy, if the costs associated with retrenchment are high. A relaxation of the labour legislation enabling firms to readily lay off workers may thus be required to enhance the subsidy’s effectiveness, and the question one must ask is, is this what we want?

Because a wage subsidy, still does not address the most important source of youth unemployment, namely, that of inadequate or inappropriate educational qualifications? There is a need to evaluate academic qualifications in South Africa and to align them to the needs of the market. Proper career advice will enable young people to choose relevant courses, if young people do not meet the entry requirements for courses with good career prospects, educational institutions should provide bridging courses. The signalling problem can also be addressed through standardisation of examinations. Externally administered tests, such as the Standard Aptitude Test (SAT) or the Graduate Record Examination (GRE) in the United States could be adopted in South Africa.

Effective job search, in turn, is best facilitated through the provision of job search assistance or job placement services. This assistance could be combined with a job search subsidy (not to be confused with a worker-side wage subsidy) that would reduce the material job search costs. Such job search subsidies have been shown to be very effective elsewhere (see Smith 2006), though there must be proper coordination between employers and the agencies that provide such assistance.

Clearly, this area requires further investigation in South Africa, where much of the focus in the area of active labour market policy intervention has been around wage subsidies and structured workplace training initiatives, such as Learnerships.

Considering all of the above, the ANC we are of the firm view that urgent and extra-ordinary measures are required to address youth unemployment. There are far too many young people who are out of work, and these numbers are growing daily. Urgent action is needed to get more young people into the work place.

Further dialogues on the need for a discussion about youth employment that embraces the private sector, public sector, youth organisations and trade unions, would be welcomed.  These discussions should aim to rapidly achieve consensus in the form of a compact or accord on youth employment.

The youth subsidy will advance as its singular purpose private companies to maximise their profits, that radical intervention by the state in the country’s economy was the only way to change the situation of unemployed young people. If the youth wage subsidy was implemented, the government would be subsidising companies to pay the wages of young people they employ.

Private companies would claim the subsidy instead of paying for labour out of their own coffers. “What the youth wage subsidy will do is to give private companies billions to spend to pay young employees instead of paying out of their own pockets.

The attempt to return South Africa to reliance on cheap labour is wrong-headed and ignores the vital lessons of the past. Strong employment growth will require wide-ranging investment and a healthy, educated and productive labour force. The youth wage subsidy does nothing to address these fundamental and urgent tasks.