Minimum wages in SA’s clothing industry are two or three times higher than those for similar jobs in Swaziland and Lesotho, let alone those in India, Vietnam, Bangladesh and Pakistan.
To justify the costs of employment, levels of productivity in SA must be high. This is why our current growth path is skills- and capital- intensive and also why our economy generates fewer and fewer new jobs for every unit of economic growth.
In this context, the National Treasury has proposed the introduction of a wage subsidy for young workers. The logic is that employers would be encouraged to employ more young and inexperienced workers if their out-of-pocket costs were lower.
The wages of all workers between the ages of 18 and 29 earning less than R60000 a year – the current tax threshold – would be subsidised for a period of two years.
The Treasury estimates the programme would subsidise 468000 workers over three years. About 290000 of these jobs would have been created anyway, without the subsidy, with 178000 jobs created in direct response to the subsidy. About 45000 beneficiaries would drop out of the labour force after having benefited from the programme. The net result would be 133000 more young people employed by 2015. The programme would cost R5bn over three years (or 0,2% of the budget over that period), with each new job costing about R37000.
Employment is vital for SA’s social, economic and political development. It is the key mechanism for addressing mass poverty. Jobs also generate a sense of accomplishment, dignity and participation. Other benefits flow from higher levels of employment. Many skills needed to improve a worker’s employability – punctuality, discipline, the ability to work with others – are most easily acquired on the job. Millions of the unemployed are the products of a dysfunctional education system. The workplace is therefore the key institution in which they are most likely to acquire skills.
In a modern economy, employment is also critical to social inclusion.
As the Treasury has noted, the proportion of working-age adults with jobs may be the best measure of inclusion – far better in many respects than the Gini co-efficient.
By this metric, Brazil, where more than 60% of adults have jobs, is a far more inclusive society than SA, where barely 40% have jobs, even though levels of inequality are similar. Dynamic economies in Asia have expanded the absolute number of jobs and therefore social inclusion.
Many of these jobs do not pay high wages or offer good conditions. However, they pay better than almost any alternative form of employment for unskilled people and they exist in very large numbers.
Once high employment levels are reached, productivity gains and progress up the industrial value chain lead to a rapid rise in worker s’ incomes and quality of life.
SA by contrast has tried to ensure that all jobs are well paid and well protected. This has raised the cost of employment and led to far fewer jobs.
The Treasury’s proposal is a significant break from this. For the first time, an intervention is being proposed that takes seriously the effect of high employment costs on the pace of job creation. This injects a dose of realism into the debate about SA’s choices.
But is a wage subsidy the best way to create jobs in SA?
A wage subsidy transfers some of the costs of employment from employers to taxpayers. It does nothing to address the current regulatory regime, which plays a key role in raising the costs of employment. The proposal is also too small to significantly affect the scale of the unemployment crisis. Nor is it clear what its effect could be on the politics of reforming the labour market.
Nonetheless, there is merit to the Treasury’s proposal. If its estimates are correct, and the subsidy would increase employment by 133000 jobs at an overall cost of R37000 a job, it would use public funds more efficiently than some other interventions. The Expanded Public Works Programme, for example, creates short-term, low-wage jobs at an annual cost to the taxpayer of R100000 for the equivalent of a full-time job.
The Industrial Development Corporation’s plan to provide concessionary finance to job-intensive investments will target projects that create jobs at an average cost of between R250000 and R500000.
Wage-subsidy jobs would be created in the private sector and are therefore more likely to be in areas of the country (and sectors of the economy) in which sustainable employment is a more plausible outcome than is the case with other proposals.
All this suggests that the wage subsidy is a sound use of public resources.
There is good evidence from countries as diverse as the US, Belgium and Singapore that wage subsidies encourage employment and help reduce poverty.
However, the Treasury’s proposal could be significantly strengthened if it were coupled with a probationary period during which new, subsidis ed workers could be dismissed with “no questions asked”.
When Harvard University’s James Levisohn first made the case for a wage subsidy in 2006, he argued that this provision was “essential”.
By allowing employers to dismiss unsuitable workers quickly and easily, a probationary period could increase the number of jobs created – perhaps significantly; help target subsidies to the most productive, capable workers; and increase the likelihood that those employees retained by their employers would be kept on when their subsidies expired.
A larger programme might also help change the terms of the debate, and start convincing those who would like to increase regulation of the labour market that creating more jobs will require a lowering of the costs of employment.
Addressing unemployment is SA’s most pressing national priority. A relatively small wage-subsidy programme will not have a very significant numerical effect. Nonetheless, this proposal – if seen as a learning experiment with vital policy implications – holds more promise than many other government initiatives costing considerably more. It would be a tragedy if this modest experiment was defeated or abandoned.
A wage subsidy is not a comprehensive response to the crisis of unemployment.
It is, nonetheless, a step in the right direction. Its effect could be dramatically enhanced if it were linked to reform of the labour market.
If SA is to become a more inclusive society, much more needs to be done to help young people to get jobs. This could be an important first step.