Wage-Employment Subsidy report Sept 2012

Analysis: Wage/Employment Subsidies for

employment creation

By

Mokoena Joseph Teboho

2012

Analysis: Wage/Employment Subsides for employment creation

of 22

T A B L E O F C O N T E N T S

1.BACKGROUND ............................................................................................................................................................ 3

2.EMPLOYMENT PROFILE ......................................................................................................................................... 4

2.1 CAUSES OF UNEMPLOYMENT IN THE SOUTH AFRICA’S LABOUR MARKET ..................................... 4

2.2 EMPLOYMENT TRENDS ........................................................................................................................................ 6

FIGURE: 1 SOUTH AFRICA REAL GDP RATE Q2: 2002-2012 ...................................................................................... 6

2.2.1 PROVINCIAL EMPLOYMENT TRENDS .......................................................................................................... 8

3. DEFINITION OF WAGE SUBSIDY ........................................................................................................................ 10

3.1 THE DIFFERENT TYPES OF WAGE SUBSIDIES ............................................................................................ 11

3.2 SELECTION CRITERIA FOR POLICY MAKERS ............................................................................................ 12

4. ECONOMIC EFFECTS OF EMPLOYMENT SUBSIDY PROGRAMS ............................................................. 12

4.1 POSITIVE IMPACT OF WAGE SUBSIDY AS FOLLOWS: ............................................................................. 13

4.2 DISADVANTAGE EFFECTS REGARDING WAGE SUBSIDIES .................................................................... 14

4.3 CONCERNING QUESTIONS ON EMPLOYMENT SUBSIDY IMPLEMENTATION .................................. 15

5. INTERNATIONAL EXPERIENCES ON WAGE/EMPLOYMENT SUBSIDIES .............................................. 15

6. SOUTH AFRICA PROPOSED YOUTH WAGE SUBSIDY .................................................................................. 17

7.RECOMMENDATIONS............................................................................................................................................. 18

8.CONCLUSION ............................................................................................................................................................ 19

9.REFERENCE LIST ..................................................................................................................................................... 20

10. APPENDIX 1 ............................................................................................................................................................. 21

Analysis: Wage/Employment Subsidies for employment creation

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1. Background

The high unemployment in both developing economies and developed economies remains a major

concern for all governments. Most governments endeavour to device means to curb the

unacceptably high levels of unemployment and many have tended to allocate considerable

amounts of funds to active labour market programs that would support the integration of

unemployed persons into the labour market. In the past developed and developing countries used

wage or employment subsidies program to increase employment levels especially in countries

which struggle with high unemployment levels. For a country to become more inclusive, its people

need to be provided with the opportunity to work and make a productive contribution to the

economy and society. Unemployment not only represents foregone output today and a waste of

potentially productive resources, but it can also have a negative effect on future output. The

unemployed do not acquire the skills or experience needed to drive the economy forward, which in

turn inhibits the country’s economic development and imposes a larger burden on the state to

provide social assistance. In addition, unemployment is associated with social problems such as

poverty, crime, violence, a loss of morale, social degradation and political disengagement (Kingdon

& Knight, 2000; Levinsohn, 2008). Employment promotes dignity, independence, achievement and

innovation and grows the economy.

The growing income inequality in South Africa has raised concern among governments and policy

makers; this gap has been partly explained by the rising unemployment levels which are facing the

country. Recently the South African government has endorsed wage subsidies as a policy

measure to deal with the country’s substantial youth unemployment problem. This was received

with mixed sentiments from some groups. To support or not to support a policy there is a need for

a general understanding within the public on the pro’s and concerns of such a policy being

implemented in a country like South Africa which has huge income inequalities and it’s still in a

developmental state. The purpose of this report is to review literature of the international literature

and conducts further analyses on (1) the country’s employment profile (2) obtain insights into wage

subsidy development and implementation issues facing developing countries; (3) determine the

potential impact of such a policy on employment, income, and poverty in South Africa; and (4)

critically assess the appropriateness of such a policy, given the various sources of unemployment

in South Africa.(5) Finally draws conclusions.


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2. Employment profile

High unemployment rates are amongst the greatest challenges facing South Africa and its

provinces and the recent global crises have exacerbated the problem. The unemployment in

South Africa is still high, at 24.9 in the 2nd quarter of 2012 reported by quarterly labour survey, this

was despite the economy having grown at 2.7% in 1st quarter 2012 and 3.2% in the second

quarter. Historically the unemployment rate has averaged at 25-40% in the year 2008-2009, the

financial crises also led to massive spikes in global unemployment. The unemployment rate among

working-age youth below 25 years of age is about 50 per cent at national level. In 2010, 55% of 15-

24 year olds were unemployed in Gauteng, as compared to 51% nationally. It is worth noting that

the majority of the unemployed youth are black and that approximately 40% of all unemployed are

matric graduates under the age of 24. This is a great concern when it’s noted that some of the

young people without jobs have completed their tertiary qualification. If not addressed urgently and

effectively, the problem will lead to exceptionally negative consequences for the province.

The unemployment problem currently facing South Africa is largely structural in nature. This type of

unemployment is explained as unemployment that results from a mismatch between skills required

for the available jobs and skills possessed by workers seeking work. The country historical

background has resulted in a labour market which has a large supply of low-skilled workers in the

upper echelon of the economically active age groups which is a cause for great concern in.

Improved access to education and training has reduced the supply of low-skilled worker on the

balance. However, the labour market position of low skilled workers has worsened partly due to

technological developments which have widened the gap between jobs that can be provided for

the low-skilled and those for higher skilled jobs. This would imply that the labour force has

insufficient skills to take up all the types of employment opportunities created by industry.

Additionally the skills acquired by the labour force are those which is not readily demanded by the

current labour market this further exacerbate the unemployment challenge. Mismatch between the

geographical location of available jobs and job seekers can also result in structural unemployment.

According to International Labour Office (ILO) greatest challenge with this type of unemployment

from the perspective of individual workers is not only having jobs but also the grave danger that

they may remain out of work for a long time.

2.1 Causes of unemployment in the South Africa’s labour market

Numerous policy measures have been put in place to ensure that this level of unemployment is

brought under control, but this challenge still persists. Although the skill mismatch has been

acknowledged some of the causes of unemployment in South Africa has been defined as:


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Weak economic growth.

The growth of non-tradable sectors such as business and financial services which are

skilled labour-intensive, leaving the low-skilled workers unemployed

Increases in long-term real wages discourage labour demand, a major factor in the lack of

employment growth of among unskilled and semi-skilled workers.

Minimum wage and other labour policies which business view as increased cost of doing

business.

Economic growth is critical for employment creation and its clearly outlined in the theory that the

economy is self-regulating and is always capable of achieving the natural level of real GDP or

output, which is the level of real GDP that is obtained when the economy's resources are fully

employed. While circumstances arise from time to time that cause the economy to fall below or to

exceed the natural level of real GDP, self-adjustment mechanisms exist within the market system

that work to bring the economy back to the natural level of real GDP. This theory clearly articulates

the relationship of employment and real GDP.

Simple elasticity of employment in South Africa

Annual % change in

Total Employment in all

non agricultural sectors

Annual % change

in GDP

Employment elasticity

2001-2011 3.49 0.66 0.19

Source: South Africa Reserve Bank, 2012

Employment elasticity measures the percentage change in employment induced by changes in

GDP.A simple employment elasticity for the period 2001-2011 shows that employment elasticity

was 0.19.That is a percentage increase in economic growth is associated with 0.19 percentage

increase in total employment in all the non-agricultural sectors. This indicates that employment in

South Africa is less responsive to changes in economic growth, this means economic growth will

have to grow at a higher rate in order to reduce unemployment. Therefore South Africa needs

more than high economic growth to significantly eradicate the unemployment problem.


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2.2 Employment trends

Figure: 1 South Africa Real GDP Rate Q2: 2002-2012

Source: Statistics South Africa 2nd Quarter 2012 GDP

The economic performance on quarter-on-quarter was roaming around 5% from 2005 until 2007,

the decline in Real GDP growth was a result of the impact of financial crisis. The economy in

recent years has been consistent growing at 3%, only in the year 2009 they was a significant

decline in growth rate of -1.5% as the full impact of the global financial crisis was felt.

3.7

2.9

4.6

5.3 5.6 5.5

3.6

-1.5

2.9 3.1

2.7

3.2

-2

-1

0

1

2

3

4

5

6


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Figure: 2 South Africa employment figures

Source: Statistics South Africa 2nd Quarter 2012 GDP ( E-View graph)

The diagram above (figure: 2) illustrate employment numbers in the country. The highest

employment numbers were recorded in the year 2008Q:4 at 14 027. There was a significant

decline in the 2009Q:1 as the economy was only able to employ only 13 843 which correlate with

the decline of the Real GDP in figure: 1 of -1.5% in the year 2009. The employment numbers have

been improving in recent years but there have not been able to achieve the 2008:Q4 numbers as

growth rates remain consistent with 3% growth. The slow growth rate is as a result of a decrease in

demand for exports from developed countries as their economies slow down due to debt crisis.

The employment losses are far more severe and persistent in percentage terms than the declines

in economic growth.

12,800

13,000

13,200

13,400

13,600

13,800

14,000

14,200

2008Q:1

2008Q:2

2008Q:3

2008Q:4

2009Q:1

2009Q:2

2009Q:3

2009Q:4

2010Q:1

2010Q:2

2010Q:3

2010Q:4

2011Q:1

2011Q:2

2011Q:3

2011Q:4

2012Q:1

2012:Q2

EMPLOYMENT


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Figure: 3 Employment by sector for South Africa


Figure: 3 indicates that between Q1:2012 and Q2:2012, the increase in total employment was

mainly driven by the increase in the number of employed persons in the Community and social

services (121 000) jobs, Construction (26 000) and Mining (21 000) jobs. Employment losses were

observed in Trade (91 000), Manufacturing (44 000) and Agriculture (18 000). Job losses in the

Manufacturing sector continues, as 67 000 jobs were lost in Q1:2012, while job losses in the trade

sector also accelerated from 3 000 jobs lost in the first quarter of this year. The Agricultural sector

reversed job gains of 26 000 in Q1:2012. Both the Community and social services and

Construction industries reflected better employment gains compared to the same period last year.

2.2.1 Provincial employment trends

The province unemployment stands at 25.4% making it the fourth lowest level compared to other

provinces Gauteng past economic growth has attracted job seekers faster than it is able to absorb

them into the formal and informal labour market and the province also receives more migrants than

any other province in the country. This has result in the absorption rate (employment-to-population

ratio) to just remain steady, even if there is an increase in employment. In order for the absorption

rate to increase, employment has to grow faster than the population.

638 357

1678

98

1012

2966

791

1737

3012

1153

0

500

1000

1500

2000

2500

3000

3500

2011:Q4

2012Q:1

2012Q:2


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Figure: 4 Employment by province


Figure: 4 shows employment by province, between Q1:2012 and Q2:2012, employment gains were

recorded in five of the nine provinces, with the highest increase in jobs observed in Mpumalanga

(40 0000), Limpopo (22 000) and Eastern Cape (19 000). Job losses were reported in Western

Cape (32 000), Gauteng (15 000) and Free State (9 000) over the same period. The Gauteng

province is the largest employer when comparing provinces on average, KwaZulu-Natal takes

second place and Northern Cape is least employer.

13

10

2

5

19

5

31

7 8

0

5

10

15

20

25

30

35

2011:Q4

2012Q:1

2012Q:2


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Figure: 5 Human development index of provinces

Source: Global Insight 2012

Figure: 5 indicate the HDI1 for provinces and Gauteng province ranks second place. This is an

indication that the majority of the Gauteng province population has high life expectancy and

education and that there have been some improvement in the standard of living of the inhabitants

of the province.

The analysis above indicate that the number of employed workers has increased but the

unemployment rates have increased which indicate that more jobs are needed in order to address

the current unemployment levels.

3. Definition of Wage Subsidy

Wage/Employment subsidy is a policy measures that is implemented through labour market

programs aimed at improving the labour market position of the unemployed in the short run

through the creation of jobs by providing wage subsidies to employers in the private sector. The

Wage subsidies can be classified in two categories which is either as worker side or the firm side

1 *The HDI is a comparative measure of life expectancy, literacy, education, and standards of living of a country. It is a standard means of measuring

well-being, especially child welfare. Also to measure the impact of economic policies on quality of life

0.70

0.53 0.60 0.57

0.52 0.53

0.67

0.53 0.54

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2008

2009

2010

2011


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programs. The worker side wage subsidy gives workers a subsidy upon successfully obtaining

employment. The primary objective of these policies has been to increase participation in the labor

market. Examples of these policies include the Working Families Tax Credit program in the United

Kingdom and the Self-Sufficiency Program in Canada, which targets parents with children (Smith

2006). The firm-side wage subsidy is given to the firm to encourage it to employ more workers. The

wage subsidies lower firms’ costs of employment without affecting workers’ take-home income and

it enables the firms to increase employment and production output.

Worker side subsidy would be offered to employees in countries that faces labour supply

constraints due to stipulated wages or in cases where labour market failure is characterized by

unemployment (usually in developing countries).Literature notes that firm-side subsidy that

promotes demand for labour is more appropriate in cases where unemployment levels are very

high. Additionally, when poverty is closely associated with unemployment, a wage subsidy may be

useful as an antipoverty measure. In this regard, wage subsidies can be classified either as

worker-side or firm-side programs and their primary objective is to increase participation in the

labor market.

3.1 The different types of Wage subsidies

1. General wage subsidy

This type of wage subsidy is paid to all low-wage workers to ensure better wages at no extra cost

to the employer by lowering labour cost.

2. Targeted wage subsidies

Targeted wage subsidies are subsidies which are tailored for particular groups of unemployed

people and are typically granted for a limited period of time. The targeted wage subsidy can be

used to address high rate of unskilled and semi-skilled workers which is attributed to various

factors, including past political decisions, educational inequalities, and poor economic growth.

Three types of targeting subsidy include:

Sector targeted subsidy -Subsidy which is paid for workers in pre-defined sectors such as

the manufacturing sector.

Size-targeted subsidy-Subsidy paid to small-scale firms or/and newly established forms.

Group-targeted subsidy is paid for each worker in pre-defined groups such as race, age,

gender and long-term unemployed.


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3.2 Marginal employment subsidy

This is a subsidy paid by the government to employers for the extra employee hired regardless of

their experience or expertise for a pre-determined time period.

Although wage subsidy schemes can take a variety forms, it should be noted that they can be paid

either to employers or to employees. The subsidy itself can be paid as a tax credit or a reduction in

social security contribution or as a direct payment. Although wage subsidy programs have much

difference in how they are structured, their ultimate goal is to increase employment through

lowered labour costs.

3.3 Selection Criteria for policy makers

There are various factors policymaker have take into account when selecting wage subsidy and

which industry to target.

The value-added structure: Measures an industry’s contribution to GDP and employment

structure which measures the relative size of the industry in terms of employment levels.

This is use as an indication of the size of the industry and its employment capabilities

The capital-labour ratio which measures the labour intensity of industries. This are

Industries with high labour-output coefficients for semi- and unskilled labour are usually a

sensible choice for targeting.

The wage elasticity of demand for labour refers to employment elasticity and it is the

most important targeting criterion. The employment elasticity measures the responsiveness

of employment to a change relative to changes in wages. The employment effect of a wage

subsidy will be higher in industries with high employment elasticity and typically such

industries should be selected in attempt to reduce unemployment.

Employment multipliers which calculate the interdependence between industries

changes, as changes in one industry will have an impact on the employment levels of

another industry.

4. Economic effects of employment subsidy programs

Employment subsidy programs do not only affect the targeted group, but they also have an impact

on the whole labour market generally. Although the overall aim of employment subsidies is to

increase the employment, these subsidies come with various direct, indirect effects which either

could be positive or negative or both. The labour market theory identifies several important effects

of these programs on the labour market (Pissarides, 1990):


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4.1 Positive impact of wage subsidy as follows:

a) The objective of a wage subsidy is to improve the employment prospects and opportunities

for a particular group of people. It does this by reducing the cost of employing the targeted

group relative to other groups, making them more attractive for firms to hire them. The

employment wage subsidy would lower the cost to employers of hiring targeted workers,

stimulating employment creation and improve the people's access to decent jobs in

important, well regulated and potentially rapidly growing sectors of the economy.

b) Higher employment raises the aggregate income, while the subsidy causes unit production

costs, hence consumer prices to decline in a competitive product market and this will in turn

boost consumption and savings. Wage subsidies may therefore ultimately stimulate

consumption demand which in turn leads to indirect increases in the labour demand as

firms increase production (Heintz and Bowles 1996).

c) The employment wage subsides may also compel firms to change into being more labour

absorbing. Wage subsidies may in the long run induce greater investments in industries via

an accumulation effect, which would further amplify the wage subsidy program' scale

effects.

d) Wage subsidies may also have the added macroeconomic advantage of reducing inflation

to the extent which unemployment decreases or a country's balance of payments improves

due to reduced cost of production to domestic firms. This can have important effects on the

domestic currency. An added macroeconomic objective is resource allocation as well as

income inequality. When used effectively wage subsidies are a tool to reduce poverty.

e) The hiring unemployed of persons within the wage subsidy program allow the employer to

select, at little risk, suitable candidates for permanent jobs. This effect is relevant only if the

placement within the program is temporary.

f) Matching supply and demand on the labour market becomes more efficient, thereby

reducing unemployment.

g) Lower product prices and lower cost of production improve export competitiveness and this

may have important effects on the domestic currency.

h) Finally, this programme make those that are already working less fearful of losing their jobs

assuming that they prefer participating in the program over being unemployed. This

strengthens the position of employees in wage bargaining, thereby boosting wage costs

and reducing employment.


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4.2 Disadvantage effects regarding wage subsidies

Due regard should be placed on potential unintended consequences, especially the negative ones

of introducing wage subsidies:

a. Substitution effect: occurs when an employer replaces an unsubsidized worker with a

subsidies one or when firms use subsidies workers to increases output but displaces

output among firms who do not have subsidies workers. This relates to where program

participants take jobs from people who do not benefit from the program. However such a

substitution effect depends on the elasticity of the demand.

b. Displacement/Crowding out effect is the possible reduction of jobs elsewhere in the

economy because of competition in the goods market. This effect occurs when a firm with

subsidised workers increases output, but displaces output among firms who do not have

subsidies workers and, as a result, the subsidy crowds-out employment.

c. Deadweight loss effect: Wage subsidies can be efficient in creating employment, but they

could also create wasteful spending if jobs that would have existed without a subsidy are

also subsidized. This means funding employees who would have found work without the

program. The combination of the substitution and Deadweight loss effects is called the

“efficiency loss meaning the participants in this program do not represent additional

employment.

d. Waste: wage subsidies can be efficient in creating employment, but they could also create

wasteful spending if jobs that would have existed without a subsidy are also subsidized.

e. Program misuse: may occur when employers or employees try to skim off the subsidy

without either creating the employment or working in the jobs. Also, employers can

deliberately maintain low wage levels in order to qualify for the highest benefit under the

subsidy scheme. This also includes the ‘auntie effect’: this is whereby relatives and others

are likely to be added to payroll and used to increase the subsidy claim. Also, those who

have left the jobs in unfortunate circumstances may be retained on payroll for as long as

possible to ensure increase in subsidy claim.

f. Market distortions: occurs because of wage subsidies hold up wages and so bypass the

necessary wage adjustment that must occur to balance labour markets.


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g. Administrative burden effect: Low take-up rates may occur if firms do not know about

the subsidy, or if they find the administrative work attach to it time consuming.

h. Opportunity costs: funds dedicated to a wage subsidy might be effectively used for other

government service delivery purposes.

i. Increased public expenditure effect: the fiscal cost involved as it appears to increase

public expenditure and ‘deficit’ the administrative costs of employment subsidies are

generally borne by the government, so there is no cost in this regard to the

firms/employers.

4.3 Concerning questions on employment subsidy implementation

Sustainable jobs: will employment created by a subsidy be sustainable without the

subsidy?

Will the wage subsidy be able to address a current regime which contributes to increasing

employment costs of unskilled and inexperienced workers such as minimum wage policy?

Cost and sustainability: Jobs created by a wage subsidy depends on the size of the

subsidy and larger subsidies could cause problems of affordability and sustainability

5. International experiences on wage/employment subsidies

There are various developing countries which have implemented different forms of employment

subsidy programs, but these experiences should be taken in light that different labour market

conditions prevail in the different countries.

In the years 1999-2000, Argentina implemented a wage subsidy targeted at poor

households and low-income workers. This policy raised employment by 6.1%, while the

substitution effect was low due to cost of severance pay if regular worker was to be fired.

The United States have adopted various subsidies to increase demand for low-skilled

workers and workers from disadvantaged groups. Between 1979 and 1994, United States

implemented a tax credit policy to companies that employed economically disadvantaged

youths. This policy reduced about 15% of the employers wage cost as a result having a

positive employment effects on the targeted group. However it should also be noted that it

has also been found that there is a lack of accountability in many job subsidies that are


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given to employers. Companies who receive subsidies would not create jobs at all, some

companies have lost jobs after receiving subsidies.

Singapore implemented two kinds of wage subsidies. In 2007 it introduced a Workfare

Income Supplement (WIS), which the government increased the income of 20 percent of

lower-income workers by up to 20 percent if they get employed for at least six months a

year. The subsidy’s purpose was to boost labor supply. In response to 2008/09 global

recession, Singapore provided firms who did not retrench low-wage workers with a subsidy

of up to 12 percent of the payroll. This was meant to encourage labour demand. This

subsidy resulted in job losses being low despite the country experiencing negative growth

in 2009.

Australia provided wage subsidy through to employers who offered jobs to disadvantaged

workers through its Employment Pathway Fund (EPF) between 1 October 2009 and 31

October 2011. This subsidy was intended to encourage the employment of disadvantaged

job seekers (low-skilled workers). About 68% of wage subsidies created new jobs and

better working conditions that would not have existed without being subsidies. Job seekers

who have been unemployed for more than two years were found to be three percentage

points more likely to find a job due to the implementation of a wage subsidy.

Sweden implemented employment subsidies which were required by structural change

caused by various international and domestic economic challenges in the 1970s. The

subsidies were in the form of specific subsidies to selected companies which were in

distressed sectors and/or regions.

Turkey also implemented employment subsidy called Law 5084 and 5350 during the 2004

and 2005 period. This subsidy was implemented to target all low income provinces with per

capita GDP of less than $ 1 500 (2001 prices). As a result, the targeted regions

experienced about 5%-13% employment increases during the period.

Chile implemented two training-related subsidy schemes. The one called Chile Joven was

targeted at the unemployed youth and had four sub-programmes: training and work in

firms, work training to become self-employed, training for young workers and a form of

apprenticeship programme. The other scheme offers a tax rebate to employers who provide

on-the-job training to workers aged 20 years or younger. Chile Joven was created because

unemployment in Chile continued to rise despite economic growth, leading to the


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conclusion that there was a lack of or mismatch of skills in the economy. There is also a

separate wage subsidy programme for the disabled.

There are countries from the SADC region that have also implemented the wage subsidy

policy. Botswana provides a wage subsidy for employment of unskilled/ low-skill workers.

The state covers 80%, 60%, 40% and 20% of the wages for years 1&2, 3, 4, and 5

respectively. Namibia's government offers training cost deduction at 125% tax deductible to

companies that train unskilled workers.

Evidence from countries suggests that the success of a wage subsidy can be context specific and

depends on the nature of the intervention and the structure of the labour market among other

things.

6. South Africa proposed youth wage subsidy

National Treasury (2007) lists the principal aim of a wage subsidy as being the reduction of the

cost of labour. Governments have utilised wage subsidies to increase labour demand and/or

supply or merely to increase the wages of low-income employees. In case of targeted employer-

side wage subsidies, the aim is to provide employment opportunities to the targeted worker group

by increasing labour demand for disadvantaged groups such as the long-term unemployed, the

unemployed youth, low-skilled workers. They also provide opportunities for these disadvantaged

groups to obtain work experience that can be transferable to ‘real’ jobs in the labour market. The

South African government proposed a youth wage subsidy for workers under the age of 30 whose

salaries are below the personal income tax threshold. The subsidy will be paid for a maximum of

two years and have a maximum value of R12 000.

The introduction of a youth wage subsidy has been widely criticised by labour unions and below

are some of the concerns which were raised regarding the implementation of the Youth Wage

Subsidy:

There is a concern that 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.


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A wage subsidy, however, 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.

Professor C. Malikane an associate professor of economics at Wits University and a policy

adviser to Cosatu wrote a document which discredited most of the positive experience of

other countries in term so implementation of the wage subsidy see Appendix 1. He noted

that treasury did not understand the findings that were presented in the report.

7. Recommendations

Employment subsidies may be successful at creating jobs but they should not be seen as the main

policy instrument for dealing with the broader unemployment problem. Employment subsidies are

short term as such countries thinking long term in addressing unemployment require policies that

improve economic growth and the economy’s employment absorption capacity, raise skills of new

labour market entrants, reduce labour market rigidities, and promote effective job search,

especially among the groups that face the highest levels of unemployment. Also to enhance the

effectiveness of wage subsidies, they should preferably be linked to structured workplace training,

be targeted to industries where employment will be responsive to changes in labour costs, and be

focused on the addressing the general unemployment. To deal with the skill shortage or mismatch

at school level proper career advice should 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 effective monitoring of the wage

subsidy would be the tool to counter the negative consequence, and this should include putting

restrictions to limit potential misuse of the programme. Importantly, the programme should be

designed to make it in the interest of employers and employees to use the programme as it is

intended.

Ultimately, however, wage subsidies should not be regarded as permanent solutions to

unemployment, nor are they necessarily the first best solution to the true underlying sources of

unemployment. These subsidies do not overcome the various constraints to economic growth and

job creation, which are best addressed through long-run initiatives that enhance the absorptive

capacity of firms and that improve workers’ skills and education.


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8. Conclusion

It is important to bear in mind the objective of the introduction of the wage subsidy, which is to deal

with high levels of unemployment. However, the labour market conditions prevailing in a country

should be taken into account. The conditions have to be identified to underscore and reflect the

labour market such that the development of a wage subsidy avoids negative side effects. Careful

consideration should be given to mechanisms which will have to implement and manage the

process. The successful implementation of a wage subsidy depends on effective and efficient

administrative and the institutional structure. The challenges facing the introduction of a wage

subsidy is whether it could realistically address unemployment crisis of the country as

unemployment has reached extremely high levels during the last decade in the country especially

among the youth. It is argued that high unemployment levels have negative social externalities and

are very costly to society.

Also as indicated above, economic growth is imperative to all countries as its impact on the level of

employment in the country. Arguably the weak performance of the export-oriented manufacturing

sector, in particular, has also deprived South Africa of growth opportunities and job creation at the

relatively low end of the skill distribution. The structural shifts in the economy have thus not only

lowered the growth rate, but the general shift toward the services sector has been at the

disadvantage of less-skilled labour and the overall employment intensity in the economy. South

Africa has in the past experienced high economic growth rates which have not been sufficient to be

translated into job creation. Hence policies that enhance employment like wage subsidies and

skills development should be considered in programs that aims to accelerate job creation and

address unemployment rate and the plague of poverty.


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9. REFERENCE LIST

1. Burns, J. , Edwards, L. and Pauw, K. (2010) Wage subsidies to combat unemployment and

poverty : Assessing South Africa's Options.

2. Edwards, L. and Pauw, K. (2007) Evaluating the general equilibrium effect of a wage subsidy

scheme for South Africa.

3. Heintz, J and Bowles, S (1996) Subsidising employment: Wage subsides and job creation.

4. Katz, F (1996) Wage subsidies for the disadvantaged.

5. Levinsohn, J. (2008) Two policies to alleviate unemployment in South Africa. CID Working

6. National Treasury (2011) Confronting youth unemployment: Policy Options for South Africa.

7. National Treasury Wage Subsidy: Draft Discussion Paper (IDTT Working Paper (2007)) 48.

8. Paper No. 166 Harvard University Centre of International Development.

9. Pissarides, C., 1998, Equilibrium unemployment theory, Basil Blackwell.

10. International Labour Organisation Into the Twenty-First Century: The Development of Social

Security (1984) 115.

11. “Government grants new wage subsidies for shipping” accessed at

http://www.eurofound.europa.eu/

Last Accessed 28 Oct 2012

12. http://www.hrsdc.gc.ca/en/cs/sp/hrsd/prc/publications/research/1998-000026/page06.shtml

Last Accessed 28 Oct 2012

http://www.eurofound.europa.eu/

http://www.hrsdc.gc.ca/en/cs/sp/hrsd/prc/publications/research/1998-000026/page06.shtml


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10. Appendix 1

Malikane C notes that a paper written by Katz concluded that the US employment subsidy

"has no impact on the earnings or employment prospects of out-of-school disadvantaged

youth like other non-intensive strategies that have been evaluated, it does not appear very

effective for out-of-school youth from poor families". Even though the youth wage subsidies

in the US may have had "modestly positive employment results" as Katz also reports, such

results have been statistically insignificant and they have been ineffective for out-of-school

youth, who are more than 95% of the South African unemployed youth.

In the case of the UK, the paper by Van Reenen (2003) shows that the "New Deal" for

young people consists of a range of options for young people to pursue their development.

The youth wage subsidy option is therefore one among a number of options, and it is the

least preferred by young people because of its potential career-limiting effect. The UK's

Department of Business, Innovation and Skills is opposed to youth wage subsidies. In 2009

it submitted: "Our conclusion is that this is not a feasible, cost-effective or sustainable

option for us. We also know, based on our experiences of the 1970s, that these schemes

can create distortions and prevent companies taking necessary action to restructure or

retrain to ensure their survival and success in the future, leading to failure and

redundancies when the subsidy is removed."

In Turkey, the paper by Betcherman and Daysal (2009) shows that the subsidies were not

for young people. Nevertheless it reports: "The evidence suggests that the dominant effect

of subsidies was to increase social security registration of firms and workers rather than

boosting total employment and economic activity. The gains in employment and number of

firms correspond to a surge in formalisation, rather than to real gains in economic activity.

Their results also suggest that implementing the subsidies can be a costly way to increase

employment the government ended up paying for nearly the full cost of employment

created."

In relation to Argentina, the paper by Galasso, Ravallion and Salvia (2001) concludes that

"the impact of the voucher (or subsidy) was clearly not through access to the wage subsidy

by firms. The voucher may well have encouraged workers to make more effort to find work.

By this interpretation, the voucher had an 'empowerment' effect, in making these workers -

notably young and female workers - more confident in approaching employers clearly, (the

subsidy) did not succeed in achieving a major transition to private sector jobs among


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workfare recipients in the study area". It must be noted that in Argentina, because

employers had to register workers to claim the subsidy and at the same time were reluctant

to formalise their businesses, they did not hire subsidised workers.

Wage-Employment Subsidy report Sept 2012

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