Why cosatu opposes youth wage subsidy

O'Leary reports that "among program participants a whopping Clearly, if things ended here this aspect of Poland's active labour market policy would be worth studying in more detail.

However, O'Leary provides some further, devastating information: "A large and statistically significant difference appeared indicating that those who are not long term unemployed benefit appreciably more from intervention works in terms of re-employment than those who were long-term unemployed.

Indeed, those who were not long-term unemployed appeared to capture all the gains in terms of employment effects, while those with more than 12 months of registered unemployment generally had their reemployment success hurt by participation in intervention works.

While not statistically significant, the negative impact on earnings was also greater for the long term unemployed". In short, given the long-term structural nature of unemployment in South Africa, the Polish experience is not useful and in fact, far from supporting the National Treasury and the Democratic Alliance's view, the Polish experience suggests that wage subsidies should not be adopted in South Africa.

Sweden and Slovakia : Perhaps we do not have to spend a lot of time on Sweden. Larsson 30 and Larsson 31 are the studies to which National Treasury refers.

But as Treasury itself reports, the Swedish experience does not favour youth wage subsidies. Sweden experienced negative effects on employment and earnings of participants, almost zero long run effects on employment after the subsidy has ended and negative employment effects after one year of participating in the subsidy programme.

In relation to Slovakia, National Treasury relies on a paper by van Ours We would not go into detail here since the Treasury itself also acknowledges that the Socially Purposeful Jobs, which provides a "wage subsidy for the employment of the target group", had a " negative effect on the job-finding rate ".

These observations from Treasury's own literature hardly support its and the Democratic Alliance's proposals for a youth wage subsidy. We think that South Africa can learn a lot from a careful study of the German labour market policies. The emphasis in Germany has always been on ever raising the basic cognitive skills of young people, providing them with a range of options and career paths which are embedded in a well-structured institutional context in which the state plays a central role.

Australia seems to have awoken to the reality that without developing basic cognitive skills in an institutionalised context, on-the-job training is likely to be extremely futile and costly Gross , in comparing the Canadian and German systems, reaches the following conclusion: "To summarize, the German education system is very structured and less gifted students have little access to purely academic options.

However, they can pursue advanced training in the apprenticeship programme and in vocational schools. As a result, the option least favoured by teenagers is to enter the labour market as an unskilled worker" This preference by teenagers appears to be a global phenomenon, as we have seen in the UK in relation to the "New Deal" and in Australia, and it makes sense; nobody wants to enter into dead-end job. The youth wage subsidy proposal by National Treasury is premised on the failed Canadian-style private-sector-centred labour market intervention, instead of the more successful German-style state-centred intervention, which emphasises vocational, technical and academic training linked supported by an active state-directed workplace experience component.

The employer's option [i. Such is the state of affairs in relation to international evidence. The conclusion that can be drawn from the above analysis shows that the proposals from National Treasury and the Democratic Alliance have extremely narrow and limited, if no, empirical basis in international evidence.

The very same literature that they use to justify their proposal does not support the use of youth wage subsidies. This means that they have not carefully read the literature, and neither have they bothered to analyse the strict, extremely limited and more often than not irrelevant, conditions under which wage subsidies appeared to have had extremely small positive results, at huge cost to the public purse.

The explanation is a simple neo-classical one. Labour demand is downward-sloping and labour-supply may be flat or upward sloping. In the case where there is mass unemployment, the labour supply is horizontal. Indeed, it can be shown from profit-maximisation assumptions that a wage subsidy shifts the demand for labour to the right; for the same wage employers would employ more workers.

But there are at least two complications here, with the Treasury's neo-classical diagram. The first complication is that the wage that appears on the vertical axis is both mapped on to the demand-side employers and supply-side workers.

Workers receive the same wage with or without the subsidy, but employers pay two sets of wage rates: one for the unsubsidised and the other for the subsidised. It is therefore invalid to map labour demand and supply as if these two quantities of labour are of the same quality. To be specific, what the wage subsidy seeks to achieve is to stimulate more employment for the targeted group of workers because of certain characteristics that make them normally unemployable.

Therefore, the supply and demand that should be in Box 2 of the Treasury document should be the supply and demand for the "targeted labour".

Now, since the "targeted labour" is massively unemployed, this labour has no power to set the wage, i. This means that whatever wage falls out of the profit-maximisation calculus of the firm, these targeted workers will have to accept it. Accepting the "targeted labour"demand by firms to be downward-sloping in the "targeted wage", it follows that the effect of the wage subsidy is to decrease the wage paid by firms for targeted workers.

Consequently the firm will move along its "targeted labour" demand curve. In the National Treasury document the firm experiences a shift in its demand curve. This shift is untenable, since it assumes that the subsidy's discount factor on the wage "boosts" the marginal product of labour when in fact, such a subsidy discount decreases the wage paid by the firm.

This point is illustrated by Figure 1. In Panel A we reproduce Treasury's incorrect diagram, where the subsidy discount 1-s is clearly indicated but is nevertheless incorrectly thought to shift the demand for labour to the right, so that with a subsidy, firms demand.

The Correct Diagram for Targeted Subsidy. As the National Treasury document consistently maintains without any empirical substantiation, the "large gap between real wages and productivity for young people" has to be closed by the subsidy. Thus, the subsidy reduces the wage rate from the minimum wage to the subsidised entry-level wage, so that, where is the subsidy rate. In our view, the quantity demanded for the targeted labour increases to at Point B on Panel B.

However, we also note that in a dynamic context, where economic growth exceeds the growth rate of targeted labour's employment, the slope of the labour demand curve will become steep, swivelling targeted labour demand from the solid line to the dotted line. Under these realistic circumstances, wages subsidy is likely to have only marginal effect, by just increasing the targeted quantity of labour demanded.

This flows directly from the notion of the production function which states that the more labour is employed, the more output will be produced, all else being the same. But for this to be realised the output supply curve must shift, thereby delivering a fall in output price. Clearly this process is in reality complicated, especially when the economy is dominated by oligopolies, monopolies and is imperfectly competitive.

Rather, the reverse is likely to be the case, i. In other words, the wage subsidy will simply increase the price mark-up over labour cost by the amount of the subsidy rate. Therefore the subsidy is not going to deliver the number of jobs that are projected by National Treasury and the Democratic Alliance.

We have shown that the evidence that is contained in the National Treasury document on youth wage subsidies, or even employment subsidies, leans towards the COSATU position. The overwhelming literature does not venture to estimate the economy-wide impacts of such initiatives, since in most cases they are implemented in localised places and not at national level. Those that have a more or less national scale, tend to be ineffective.

Examples here are the case of Turkey, where government ended up paying almost the entire wage. The National Treasury document dismisses this concern on two grounds: a "regulations around the dismissal of existing workers establish a legal framework the prevents this kind of substitution from occurring" and b "there is little business sense behind replacing good experienced workers who have demonstrated their productivity and value to a firm with an inexperienced, young worker In relation to a , National Treasury pretends as if it does not operate in South Africa, where the elementary rights of workers are violated on a daily basis.

Government dismally fails to protect farm workers who are trapped in near slavery and neo-feudal relationships with their employers - also domestic workers, taxi drivers, despite the Manifesto commitment to improve enforceability of labour law to better protect farm workers and other vulnerable workers.

In relation to b , we have demonstrated that unskilled workers are not being trained and are employed in sectors that require minimal skills. In addition, the existence of labour brokers who screen workers for employers also makes it easy to fire existing workers and get good ones on a subsidised basis. Secondly, even if we concede that economic growth will limit substitution, what will happen is that deadweight costs would increase, because with economic growth firms would hire more young workers even if the subsidy is not offered to them.

Thus the economics is that a low rate of economic growth would induce high levels of substitution and low levels of deadweight, whilst a high rate of economic growth delivers low substitution and high deadweight costs. But in our case, given the structure of the economy, its skills composition and the composition of skills among the unemployed, it follows that deadweight costs and substitution effects are likely to be high with economic growth. This is indeed a problem, as we have seen in many cases, such as Argentina and Turkey.

But the literature also says that these subsidies depend on training for success. But the fact that businesses have moved drastically towards outsourcing, labour broking and casualisation shows that it is good business to have a workforce that is vulnerable and flexible.

The goodness of a worker matters to business as long as that worker can be employed in as low a wage as possible, to produce as much profit as possible. The goodness of the worker is thus subordinated to the power profit. Because National Treasury does not mandate that business be held accountable for "recycling", and seeks to ensure that, during the subsidy period, these young people do not have recourse to labour protection, the proposed youth wage subsidy will produce massive "destructive churning".

A young worker under the subsidy would have hopped jobs many times when the subsidy ends, because the state is taking a hands-off approach in the process. Indeed the power of employers over these young people will be absolute. This has been noted to be a major problem in Australia and Colombia, hence the move away from subsidies towards formal training along German lines in Australia. It argues that youth wage rates are too high. However the National treasury document fails to compute this gap between the wage and productivity.

The youth wage subsidy also has no empirical basis internationally. We have demonstrated that even the literature that National Treasury and the Democratic Alliance use is not in support of the subsidy. Where these subsidies seem to have worked is under conditions that of extremely limited relevance to our situation and the effect has been very marginal. Therefore, if international evidence is to be marshalled, as National treasury has done, it points towards the correctness of the COSATU position on this issue.

Secondly the extent of coverage of collective bargaining agreements is not related to youth unemployment. Bargained wages in Germany serve as minimum wages and therefore apply to all skill categories. There is a reward for experience, as special lower wage rates exist for young people sometimes up to the age of 21 ".

Yet, Germany has a lower youth unemployment rate than Canada. Indeed there is no empirical basis to link collective bargaining coverage, or unionisation, to the scale of youth unemployment. Youth unemployment has to do with the role of the state and the structure of the economy. The National Treasury document attempts to attack collective bargaining so that it does not extend to young people, because it argues that collective bargaining pushes up youth wages above their productivity.

Yet, advocates of the youth wage subsidy sternly deny that they seek to create a two-tier labour market system. The private sector can do the same, without being given wage subsidies, but policies to support industrialisation and agriculture must be vigorously pursued. The economics of this proposal is very simple. Youth unemployment is massive, so that in the extreme case young people take the wage that is provided in the labour market mainly by employers. We assume that this wage is , which corresponds to the horizontal line labelled "entry-level wage rate, mass unemployment".

It can also be shown that as the wage rate increases, the unemployment rate will tend to rise, given the level of aggregate demand. We thus have an intersection with mass unemployment at point A, where the youth unemployment rate is high at. Alternatively, young people may have some bargaining power, in which case the "youth wage bargaining curve" tells us that an increase in the youth unemployment rate will tend to weaken the bargaining power of young people, whilst a decrease in youth unemployment will tend to increase their bargaining power.

COSATU's proposal is that the state must decrease the youth labour force by trapping young people longer into the education and training system, e. The impact of this will be to completely block young people from entering the labour market at or before matric.

So, the annual funnel will be blocked. In addition will be mopped up on an annual basis among the unemployed. The impact of this intervention will be to shift the curve to the left to in Figure 2. The implication will be a drastic fall in youth unemployment from A to B, i. However, if the youth have bargaining power, then the unemployment rate falls to and the youth wage rate will increase to. This will generate a living wage and improve income distribution, as the reserve army of the unemployed youth taken back into education and training facilities.

There are creative ways in which the FET sector, and indeed the post-school education system can be ramped up. We may think of recruiting teaching and training staff from other countries, as we build domestic capacity to do training ourselves. We can mobilise existing professionals and those that have retired to provide the necessary training and expertise. Institutions can share resources and optimise on scale economies through for example, combing examinations and testing. On the other hand, young people must be encouraged to register and seriously take their studies through a stipend.

Therefore, the R5 billion that was budgeted for the youth wage subsidy can be used to supplement a national stipend fund to encourage targeted young people to pursue studies and training, whilst the funds that are collected by SETAs through the skills levy can be used to support the public post-schooling and training sector. R a month is said to be a "high poverty line", but a crude calculation shows that this cannot cover items such as cooking oil, soap, sugar, tea, clothes, transport etc.

And Salvia A. World Bank Policy Working Paper Evidence from Australian Youth. Centre for Economic Performance. London Schools of Economics and Political Science.

PhD Dissertation. School of Economics and Political Science. Faculty of Economics and Business. University of Sydney, Australia.

CIS Policy Monographs Boston University. Columbia's Barriers for Youth Labor Market. Americas Quarterly. Do Wage Subsidies Work? Evidence from Regionally Targeted Subsidies in Turkey. Labour Economics 17, p. World Bank.

World Bank Discussion Paper. Draft Manuscript. AKF Working Paper. Email advertising creamermedia. Menu Menu Search By. Deepening Democracy through Access to Information. Follow polityZA. Close Search Polity. All these words. Any of these words.

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Close Login. Forgot you username or password? Close Email this article separate emails by commas, maximum limit of 4 addresses. For this reason Western exporters now look to rising Chinese wages with optimism. COSATU needs to place much greater emphasis on strengthening the international process in this direction.

But even now it should be possible to use the resources proposed for the wage subsidy, and more, to achieve similar ends, without threatening existing jobs, and in a way which expands the economy as a whole. The attempt to return South Africa to reliance on cheap labour is wrong-headed and ignores the vital lessons of the past.

Strong employment growth will require wide-ranging investment and a healthy, educated and productive labour force. The youth wage subsidy does nothing to address these fundamental and urgent tasks. Doron Isaacs doronisaacs is the Coordinator of Equal Education. Equal Education logo. The weak productivity of labour is central to the challenges faced by the South African economy.

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