Call for youth subsidy to be scrapped

Barbara Maregele
Young men wait at the side of the road for work. Photo by Masixole Feni.
Barbara Maregele

Labour and education rights groups have called for the immediate scrapping of the youth wage subsidy following the release of UCT research on its effectiveness.

A recent research paper published by Vimal Ranchhod and Arden Finn of the South African Labour and Development Research Unit at the University of Cape Town (Saldru) found that the Employment Tax Incentive programme had had “no statistically significant effect” on youth employment since the incentives were rolled out to businesses last year.

After a three-year battle between the DA, ANC and COSATU, the tax incentive was implemented in January 2014.

COSATU argued that the programme would displace older workers.

The Employment Tax Incentive Act is intended to encourage businesses to employ more young people through a tax subsidy.

The subsidy is paid to businesses in the form of a tax deduction for the first two years of the employment of new staff under the age of 30.

In the Saldru working paper released in October, the researchers compared employment in the first six months of the tax subsidy to the previous three years.

“In the first six months since the introduction of the ETI, we find no evidence that the ETI had any substantial, positive and statistically significant effect on aggregate youth employment probabilities,” the researchers said. They wrote: “We thus obtain a fairly precisely estimated ‘zero effect’.”

In response education rights movement Equal Education said that the UCT research painted a bleak picture of the employment prospects for the matric class of 2014.

“The authors have shown that the tax subsidy is potentially a very expensive government subsidy to businesses, with very limited impact. Before the Act was passed, Equal Education made detailed submissions to Treasury why it would fail,” the organisation said in a statement.

Deputy General Secretary Doron Isaacs said the new research echoed EE’s own conclusions about the incentives.

He said the decrease in tax revenues through the subsidy was benefiting firms which collectively would have employed most of the young people without any incentive.

Cosatu national spokesman Patrick Craven said in a written statement that the research had confirmed the federation’s earlier view that the ETI was “nothing more than a tax-payers’ handout.”

“Older workers who did not qualify for the subsidy would be replaced, causing downward pressure on wages. Employers would not have to provide any training for the young workers; at the end of the two years the workers would be thrown back into unemployment and there would be no drop in the level of youth unemployment,” he said.

Craven said instead of tax going to big businesses to incentivise them for what they should be doing anyway, the money should be allocated to fund projects in the Youth Employment Accord.

“The unemployment rate among youth 15 to 34 has increased from 32.7% in 2008 to 36.1% in 2014. The youth unemployment rate has, on average, been 20% higher than that of adults. Youth make up 52% to 64% of the working population, yet account for only 42% to 49% of those with jobs,” he said.

Ranchod, the paper’s lead author, said it would be irresponsible to stamp out the policy purely based on the six-month data in the study.

“Our study, however, also highlights some of the ways in which the policy is designed that will likely limit the effects of the ETI, and this raises questions about the value of the policy independently of the data available so far,” he said.

Ranchhod said if the ETI had worked according to plan, then the positive effects should have been seen immediately as well as in the long term.

DA shadow deputy minister for finance David Ross said the DA’s original proposal had been “watered down” and the party would work to fix this in parliament.

“The fact that this is a watered-down version of the original Youth Wage Subsidy is shown in the cost estimate of R1.3 billion to R3 billion, significantly less than the original R5 billion tax loss budgeted in 2010. The effect of this is to dramatically reduce the number of young people estimated to benefit from the subsidy,” he said.

Ross said the original version of the subsidy would have helped 423,000 youths, but the Medium Term Budget Policy stated that this new version was expected to support about 200,000 jobs.

“It is concerning that according to the research there was no evidence that the ETI had an impact on the rate young people were employed or lost their jobs so far. I have written to Stats SA, the Department of Labour, and the National Treasury to verify the information on progress,” he said.

National Treasury spokesman Jabulani Sikhakhane said it was too early to assess results. The ETI programme would be reviewed at the end of next year.

“After the review at the end of 2016, a decision on the future of the ETI will then be taken. More time is required to adequately assess the overall success of the policy … The incentive will then be up for review in 2016 where adjustments may be made to improve its impact and effectiveness,” he said.

According to Sikhakhane, at least 270,000 people had been employed through the scheme until the end of December last year, with 29,000 employers claiming from the scheme.

“National Treasury is working with the South African Revenue Service to use the data in the bi-annual reporting requirements from employers to create a more detailed assessment of the impact of the Act on youth employment,” he said.

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TOPICS:  Government Labour

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