South Africa has one of the highest unemployment rates in the world. This was true even before unemployment rose as a result of the global financial crisis in 2008. And before COVID-19.
The country’s youth unemployment rate is even higher than average. The employment tax incentive (for youth) was supposed to help address the problem. The incentive was adopted by Parliament in 2013 and came into effect in 2014. The original incentive offered to reduce the tax bill for companies employing new workers between the ages of 18 and 29 earning less than R6,000 per month (US $ 400). The idea was that reducing the effective cost of hiring young workers, subsidizing up to 50% of their salary, would lead companies to create more jobs for this group.
The policy was renewed in 2016 for another three years. And in 2018, shortly after Cyril Ramaphosa took office, it was extended for 10 more. The highest age limit was raised to 35. And it was made applicable to all new employees of companies operating in ‘special economic zones’ regardless of age. exist currently 11 formally designated zones.
The adoption and implementation of the policy has been cited as a success story in two respects. First of all, how triumph of evidence in the formulation of public policies. Second, how an effective approach to reducing unemployment that should be expanded.
In a recent published article I contend that the first claim is false and the second claim is not supported by existing evidence.
The analysis suggests that decisions to adopt, extend, and expand the policy were based on misrepresentations of the evidence available at the time. This was accompanied by hiding or downplaying potential policy weaknesses and risks.
In addition to this, the currently available evidence does not convincingly show any substantial effect on job creation. That means that the incentive is effectively a subsidy to company profits, thereby increasing social inequality rather than reducing it.
Where it started
The idea that reducing wages could increase employment seems pretty obvious. But it faces a number of serious challenges.
Much has to do with the structure of the economy. If most of the unemployment in the country is “structural”, as is the case in South Africa, then simply reducing the direct cost of labor may have little effect.
Structural factors include many of the legacies of apartheid and colonialism:
- distance from job opportunities in urban areas
- the sectoral structure of the economy and the lack of competition in some sectors
- lack of skills or poor quality education, and
- several other dimensions of poverty that prevent adults of working age from participating fully in the economy.
Historically, those who have favored wage subsidies tend to occupy one of two positions. Or they minimize those factors and instead emphasize the role of unions in raising wages. Or they argue that a subsidy can offset the negative effects of structural factors on firms’ employment decisions.
While these debates have been going on for decades, the current employment tax incentive grew out of the work of a group of American economists appointed by then-President Thabo Mbeki to advise on economic growth. its final report in 2008 supported the idea of a youth wage subsidy in the form of a fixed value voucher for all youth 18 years and older that would subsidize their salary at any employer, on the condition that employers can fire such workers without having to give reasons.
A member of the panel came up with that idea and then partnered with a group of researchers from the University of the Witwatersrand to test a version of it with an experiment funded primarily by the University of the Witwatersrand. International Initiative for Impact Assessment (known as ‘3ie’).
Experiments of this kind have been claimed by some influential economists it is the most credible form of evidence that exists for policy making, but that claim is vulnerable to a series of criticisms.
The basic purpose of the wage subsidy experiment was to estimate how sensitive the job was to a subsidy. Whether such a policy is profitable depends on how many new jobs are created thanks to the money spent.
As early as 2008, the then Finance Minister Trevor Manuel had already endorsed the idea of a youth wage subsidy based on the panel report. In 2011 the National Treasury prepared a extensive policy document which also endorsed the basic idea. He projected that 178,000 new jobs would be created over three years at a cost of R5 billion.
The problem with the work of the Treasury and the subsequent academic modeling, was that to make such forecasts he had to assume the answer to the fundamental question: how does employment respond to a subsidy. Faced with opposition to union policy in particular, the government supported the idea of an experiment to test this assumption.
In the run-up to the decision on Parliament’s policy proposal in 2013, the lead researcher behind the experiment reclaimed in the press that had shown that the grant would be a success:
Introducing a wage subsidy similar in size to the one being tested… around 88,000 new jobs would be created a year.
And the National Treasury made reference to the positive results in the 2013 budget review.
What the evidence really says
TO detailed analysis of the experiment and its findings shows that the study did not provide evidence to support the wage subsidy.
In addition to many other limitations, the experimental intervention was very different from the incentive and its main findings could easily have been the result of factors other than job creation. The nature of the relationship between the researchers and the Treasury, reflected in the researchers’ “policy influence plan,” suggested a shared desire to justify the policy proposal, rather than an objective effort to determine whether it would work.
And the study has never been published in any peer-reviewed media. All of which contradicts claim (is that the intervention demonstrates the value of randomized policy experiments in developing countries.
The process to review the policy in 2016 was also deeply flawed. Once again, studies that had been carried out in collaboration with the Treasury were cited to show that the policy was a success. But again, these were not released for scrutiny before Parliament made its decision.
What should happen
Since 1994, ANC governments have expressed their ambition to position South Africa as a ‘developmental state’, even in the National Development Plan. One of the critical characteristics of these states elsewhere is their ability to learn from mistakes, including a willingness to scrap failed or ineffective policies.
This approach should be applied to wage subsidy policy. Rather than reducing unemployment, the policy appears to be serving as a costly subsidy to already profitable companies for employees they would have hired anyway. If tackling unemployment is the real priority and the government is serious about being a successful developmental state, politics must end and resources must go elsewhere.
Seán Mfundza Muller, Principal Investigator, Johannesburg Institute for Advanced Study, University of Johannesburg