Youth Wage Subsidy and the Spectre of a Two-tier Labour Market

youth unemployment
Wednesday, 14 April, 2010 - 11:08

Youth unemployment is a major problem in South Africa. The Department of Higher Education should transform tertiary education to enable learners to acquire practical, skills oriented, vocational training. The country should also rethink its investment in critical school subjects like Maths and Science, introduce the national youth service within the framework of the Expanded Public Works Programme and provide a wage subsidy, in order to address youth unemployment. Our country should follow in the footsteps of countries such as China where workers benefit from social wages in the form of efficient public transport. The restructuring of the Sector Education and Training Authorities will go a long way in equipping entrants into the labour market with workplace skills. In addition, our economy should be transformed into one that creates sustainable jobs and end unemployment

The Minister of Finance, Pravin Gordhan, placed the issue of a wage subsidy for young job seekers on the table in his recent budget speech. This is not a new proposal as it was tabled by his predecessor in one of his budget speeches.

As expected the response to this proposal has been highly polarised. At the one extreme, the Congress of South African Trade Unions (COSATU) led trade union movement has rejected the proposal as smacking of a two-tier labour market system. That is, a labour market comprised of a segment protected by labour legislation and another layer that faces the unregulated might of the employer. Objectively speaking, South Africa already has a two-tier labour market due to the proliferation of non-standard forms of employment like sub-contracting, casual work and labour broking. The emergence of these forms of employment has created a layer of workers that cannot realistically be said to be enjoying the rights enshrined in the Constitution and labour legislation.

What COSATU fears is that a wage subsidy may have the effect of displacing full-time workers. A rational employer would rather choose this new source of cheap labour instead of being hobbled with expensive full-time workers. To boot this will be at the expense of the tax payer who, as Gordhan pointed out, will foot the bill through the South African Revenue Service payroll tax platform.

At the other end of the spectrum is the view popular within the business lobby and elements of the mainstream media. This group has welcomed the Minister’s proposal unconditionally as they see it as an effective means of drawing young people into employment. At the core of this approach is a belief that the labour laws and the institution of collective bargaining have raised the price of labour to the extent of blocking young workers from gaining a foothold in the labour market. As such there is a belief that workers have priced themselves out of jobs and that an intervention which supports youth employment is urgently needed. Theoretically, the neo-classical model holds that at a certain wage level, the labour market should clear, and if it does not, then there must be something hobbling the market. This is the underlying ideological attack on workers’ rights in general.

It is our firm view that the intention to support youth employment is a noble one but the means sought to be used may cause more damage than is warranted. This view is based on our understanding of labour market trends post 1994. Employment, or its converse, unemployment, can either be explained as a supply-side or a demand-side problem. An alternative route is to seek a holistic approach that appreciates the supply-side and demand-side constraints to labour absorption. The purpose of this intervention is to argue for such an approach in addressing the issue of youth unemployment.

Let us first review the fact and experience of unemployment for young people. Statistics South Africa (Stats SA) data on the labour market is unambiguous that the country faces a crisis of youth unemployment. Almost three-quarters of the unemployed are people between the ages of 15 and 34 years. Youth unemployment is especially acute in the age-cohort 15-24 years which incorporates new entrants into the labour market. Nearly a third of all unemployed people in our labour market are found in this age category.

Furthermore, a gender breakdown shows that it is typically young African women who are worst affected by unemployment. While we have no current composite figures for unemployment by population group, sex and age, data show that by September 2007, African women between the ages of 15-34 years made up two thirds of all unemployed women in South Africa. This trend is unlikely to have changed in the last few years; in actual fact, it has probably become worse due to the recent economic recession.

Another sobering fact is that many of the unemployed youth reach the age of 30 years without a job which raises a bigger sociological question of the quality of human beings that this society is creating for the future. One of the key contributions of gainful employment or income-generating activity is the fact that it provides structure and discipline for the employed. Unemployment is a very destructive experience as it erodes a person’s self worth and puts to waste the country’s massive investment in education.

If we turn to the issue of wages, available facts defy the popular discourse of an expensive, highly paid South African workforce. Figures supplied by Stats SA show that by the end of 2007, over 50 percent of workers in the entire labour market were earning R2 500 or less per month (unfortunately Stats SA does not publish these figures anymore). On the other hand, collective bargaining covers only about a third of all workers in the economy and this, coupled with the fact that the majority of workers earn what are in effect starvation wages question the popularly held view that ordinary workers are overpaid. Interestingly, findings published two years ago by the Development Policy Research Unit on the impact of collective bargaining on wages showed that it is only in the public sector where there has been a significant remunerative advantage associated with bargaining council membership. No such association was found for the private sector where collective bargaining has largely declined.

Of course it will be argued that compared to Chinese and other workers, South African workers, for example in clothing, are better paid. The question to pose is whether we are comparing apples with apples.

It is a well known fact that China manages its foreign exchange very carefully whereas South Africa has a managed-floating exchange rate system. This implies Chinese wages are likely to be understated when compared with South Africa. Another factor often ignored is that workers in China (at least in the big centres like Shanghai) benefit from a substantial social wage in the form of efficient public transport. South African workers finance most of the social wage (education, transport, health) out of the back of their pockets. Thus it is important that such factors be taken into account when comparing South African workers to workers in other parts of the world.

Still, South Africa has a small pocket of highly paid skilled workers due to the past policies of job-reservation and favourable investment in education for whites. As such, our economy is paying a premium for these workers. But skill does not explain why new entrants are not absorbed in all sectors of the economy. There are many activities that require proven literacy and numeracy to function effectively in a job. The quality of education aside, many of the young people seeking employment have at least eleven years of education yet; the economy does not absorb them as effectively as possible.

At the height of employment creation between 2005 and 2007 when the economy was creating on average 500 000 jobs per year, it was surprising that the labour market still had a shockingly high number of unemployed graduates. Official figures showed for instance that by September 2007, there was a total of 196 000 graduates with degrees in fields such as health and social sciences (17 000), engineering (24 000), physical and mathematical sciences (25 000) and business and commerce (66 000), who could not find work. Two reasons may help to explain this contradiction; one, that employers are simply reluctant to employ graduates who do not have the required experience or two, that our labour market is simply dysfunctional. The latter is closer to the truth.

To address the problem of youth unemployment, careful thought needs to be given to a range of interventions and not simply a single mechanism such as a wage subsidy which in any event, has the potential to widen the fissures already present in our labour market. The starting place should be our education system where we ought to rethink the investment we have made so far in the study of critical subjects like mathematics and science. A vast improvement is needed in this area including among others, the provision of sufficient numbers of teachers and equipment in our schools.

At the higher education level, emphasis should be less on formal degree qualifications and more on practical, skills oriented, vocational training. It does our economy no good to have hundreds of thousands of young graduates with advanced theoretical knowledge and not an idea of how to repair a broken boiler. As the Minister of Higher Education, Blade Nzimande, remarked somewhat sombrely at COSATU’s education and skills conference in July last year, we are one of the few countries where the tertiary education system is larger than the middle-level polytechnics and college system. In other words we have a top heavy education system that places a lot of capital on theoretical learning at the expense of skills acquisition and experiential training.

Between Matric and enrolment in a college or university, we should introduce the national youth service where young people are placed in gainful activities such as public infrastructure development. This could easily be done within the framework of the Expanded Public Works Programme.

There is also the question of how we manage the transition of young people from the education system to the world of work. The Sector Education and Training Authorities (SETAs) were meant to play this role by equipping entrants into the labour market with workplace skills. With a few exceptions however, the performance of SETAs has been dismal. Placing these institutions under the Ministry of labour was a big mistake which only serves to show that we did not really know what we wanted to do with these bodies. Also, having 27 SETAs in an economy divided into ten broad sectors was a serious waste of resources. Current proposals towards the restructuring of these bodies is a welcome development, but this should extend to their rationalisation in order to limit duplication of functions eliminate turf battles and ensure coherent policy implementation.

Another challenge is to minimise the job search cost for young people, perhaps through the one-stop shop labour centres. Anecdotal evidence suggests that the cost of finding a job is prohibitively high for new job seekers. To start with, a job seeker must first find information about available jobs. The primary media is newspaper advertisements or word of mouth. Thereafter, the job seeker must be able to prepare and transmit the job application, at a cost. If invited for an interview the prospective worker should also travel to the place where this will take place.

In the final analysis we must ask the hard question why the economy is not creating mass sustainable jobs able to drastically reduce unemployment. Part of the reason, we feel, is the lacklustre performance of our manufacturing sector which is said to have high labour absorptive capacity. Another reason may be the high capital intensity bias of many of the higher-end manufacturing, mining and services industries that are unlikely to mop up existing unemployment to any significant degree. At the same time we should learn from the sectors that have managed to absorb new job seekers, for example retail, security services, restaurants; personal and community care. In addition, we should ask hard questions about the failure of structures like the SETAs, which, despite massive tax incentives, have not created sufficient learnership opportunities to absorb the bulk of new entrants into the labour market.

We have attempted in this analysis to argue for a much broader and well-thought out process of stimulating employment creation for the youth. A youth wage subsidy, while appealing to government and employers, is a simplistic way of responding to what is obviously a set of complex, structural problems in our labour market. It will only serve to deepen our two-tier labour market not at the expense of employers, but at the expense of workers and government. Ultimately, South Africa requires a comprehensive and integrated employment creation strategy that identifies sectors with high job creation potential in both the private and public sector. The newly unveiled Industrial Action Plan is a step in that direction but it needs to be complemented by the elevation of employment creation as a priority for all government entities.

- Oupa Bodibe is principal analyst at the Competition Commission. He writes in his personal capacity.

- Kimani Ndungu is senior researcher – National Labour and Economic Development Institute (NALEDI)

Related organisation(s): 
Congress of South African Trade Unions

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