South Africa: Wage Subsidies will Increase Unemployment

Published on 20th May 2008

A wage subsidy has once again been proposed as a possible means to alleviate South Africa’s chronic battle with unemployment. The call, this time, comes from a group of world-renowned Harvard University economists.

The SA Treasury had proposed a general wage subsidy for all low-income earners. The Harvard group deviates slightly from this by proposing a targeted wage subsidy, aimed at alleviating youth unemployment. More specifically, they suggest the wage subsidy be aimed at first time school leavers to increase the probability of the individual finding employment and, once in the labour force, standing a relatively good chance of staying in it. The proposal envisages every 18-year old being granted a once-off R5,000 subsidy with the proviso that an easy-fire dismissal policy applies during the subsidised period.

The Harvard group pointed out that SA’s relatively low labour force participation rate of 56.5% (the number of persons in the labour force expressed as a percentage of the population aged 15-65 years) was a potential hindrance to economic growth. It can be inferred that their promotion of the wage subsidy is based partly on the belief that those outside the labour force will be enticed to participate in it, and that, at the same time, a wage subsidy would provide potential employers with an economic incentive to employ young people. But if we look at SA’s labour absorption rate of 43.5% (the percentage of the population of working age who are employed), it indicates that the problem is on the demand side of the market. A subsidy may overcome this by making it more attractive for employers to hire first time job entrants, but surely if employers could hire any person, pay them commensurately with their levels of productivity, and be allowed to dismiss employees if they do not fulfil their obligations, it would be more promising for SA’s economic growth?

The sayings, ‘if you can’t fire, you don’t hire’ and ‘you can’t hire those who don’t earn their keep’ may be unpalatable to politicians but they are harsh realities when employing staff responsibly. If government reduced the bureaucratic red tape and relaxed the statutory requirements that prevent people from getting jobs, the number of employed people would increase dramatically. Although the subsidy may seem to be the answer to increasing employment opportunities, it would probably be the clause that employers can fire more easily during the trial period that will be the true incentive.

The unintended consequence of the SA governments’ attempts to protect workers and provide them with greater job security is that the current labour laws effectively prevent the unemployed from gaining employment. SA labour laws provide already employed people with a high degree of security at the expense of the unemployed. Labour union representatives argue that any weakening of job-security legislation and erosion of minimum wages will lead to increased poverty. But unemployment is a significant driver of poverty and inequality

For government to achieve its stated objective of reducing unemployment and stimulating growth, it must carefully consider how labour market policies affect unemployment and hence SA’s prospects for growth and the reduction of poverty.

Instead of a wage subsidy, an alternative solution that will not increase the burden on the fiscus or disturb the job security of the employed would be to give anyone who has been unemployed for more than six months a two-year exemption from the labour laws and to allow the exempted person to make any written arrangement he or she wishes with an employer who is prepared to offer them employment. This proposal will not solve the unemployment problem overnight but it will give hope and provide job opportunities to the currently hopeless.

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