In a statement from early January, the Treasury provided the public with some hard numbers about South Africa’s year-old Youth Employment Tax Incentive (ETI).
The Treasury lauded the success of the programme, noting that 270 000 young people, and 29 000 employers, were benefiting from the government’s ambitious plan to alleviate youth unemployment.
Take-up of the incentive was “higher than expected”, according to the Treasury, and the positive impact of the programme was widely publicised. However, a study using data from the nationally representative Quarterly Labour Force Survey (QLFS) has found that the job prospects faced by young workers did not improve significantly last year, despite the high take-up of the incentive. In this article we offer some explanations.
One of the features of the South African labour market since the transition to democracy in 1994 has been a stubbornly high level of unemployment. The unemployment rate among the youth – those between 18 and 29 – is particularly high, and is more than double that of the overall population.
In fact, youth unemployment is so pervasive that almost two-thirds of youth have never held a job (National Treasury, 2011).
Policy discussions aimed at boosting youth employment have been taking place since the mid-2000s, with the objective of raising employment levels and mitigating the negative effects of being unemployed for an extended period. These discussions led to the ETI, which was initiated on January 1, 2014. The ETI intervenes directly in the labour market by reducing the cost of employing young workers, and is one of the most ambitious employment initiatives in South Africa’s history.
The ETI’s central aim is to create 178 000 new jobs in three years at a cost to the government of R5 billion – about R28 000 per new job.
In this article we discuss the results of a study that we undertook in order to determine whether the ETI had made a significant impact on youth employment in the short run. Detailed nationally representative data on the labour market is collected every three months by Statistics SA in the form of the QLFS.
We make use of this data from 12 quarters before and four quarters after the start of the ETI to examine whether the programme met its stated aims in its first year.
We find no evidence of a positive effect on youth employment probabilities in the short run, and no evidence that the implementation of the ETI has led to increased levels of churning among youth in the labour market.
We also don’t find evidence of any displacement of older workers by youth who are covered by the ETI.
Young workers qualify as eligible for the programme if they hold a South African ID, are aged between 18 and 29, and were not in their current job before October 1, 2013.
In order for employers to claim the tax credit for eligible employees, they must be registered for pay as you earn (PAYE) income tax.
The ETI works by allowing the employer to lower the amount of PAYE paid to Sars every month, based on how many employees are covered as well as their salaries.
Employers may claim tax credits for youth workers in their employ for a maximum of 24 months.
The Employment Tax Incentive Bill sets out the amounts that employers can claim from the incentive each month.
This information is presented in the table pictured.
The wage is subsidised by 50 percent up to R2 000, beyond which the subsidy is a flat rate of R1 000, up to a wage of R4 000.
In the final segment the cost to company and the wage received by the subsidised employee converge until they meet at R6 000.
To see if
the ETI improved the probability of young people finding a job, we must ask: “What would the employment trends in the labour market look like had the ETI not been initiated?”
Doing so requires the use of labour market data, and the QLFS is well suited.
We compared the probabilities of a young person being employed to someone aged 30 and above being employed before and after the start of the programme – the youth fared no better and no worse than they would have if the ETI had not been implemented.
We are also able to answer two questions. First, we may want to know if the introduction of the ETI led to a higher turnover of jobs among the youth.
Increased churning of youth in the labour market could be of concern if companies lay off workers in anticipation of employing youth at a subsidised rate. We find no evidence that this was the case.
Second, we want to address the concerns raised by some members of society that employers would choose to replace older workers with young hires covered by the programme. Again, we find no evidence of this during the first four quarters of the ETI.
How then can we reconcile the Treasury’s statement that 270 000 young workers were covered by the programme in 2014 with our finding that employment probabilities for young people did not improve?
While 270 000 young people may have benefited from the ETI last year, it is not necessarily the case that all of these were new jobs created as a result of the programme. Indeed, this latter claim was never made by the Treasury – it was sometimes misinterpreted and misquoted by social commentators in the media.
In order to understand how about R2bn could be spent on the ETI in its first year without significantly improving the job prospects of the youth, it is useful to consider three scenarios.
First, a young person may be employed in an existing position that someone has vacated. This is simply a result of natural job turnover.
Second, the growth of the economy implies that new jobs will be created, even without the ETI. So a young person may fill a position that is brought about by natural job creation independently of the ETI.
Third, a young person may fill a new position that has been created only because of the implementation of the ETI. Only the third would have an impact on the probability of a young person finding a job purely because of the ETI. However, tax breaks may be claimed by an employer under all three scenarios, and all three would comprise the 270 000 claimants in 2014.
Our analysis focuses only on the short run, and the benefits to youth employment probabilities may only become apparent in the medium to long run. However, despite the high cost and wide coverage of the programme, the short-run effects on the probability of a young person finding a job have not changed since the introduction of the ETI.
Further research is required.
* Vimal Ranchhod and Arden Finn work at the Southern Africa Labour and Development Research Unit at UCT
THE STAR