Youth Wage Subsidy shown to have 'zero effect' - EE

Organisation says UCT study found initiative to have no 'statistically significant and positive effect'


Tuesday, 13 January 2015

Matric class faces bleak prospects as government's signature youth employment instrument fails to deliver. Equal Education calls for immediate scrapping of a failing policy

Government's flagship youth employment initiative is a flop. According to a new paper published by researchers at UCT the Employment Tax Incentive (previously termed the Youth Wage Subsidy), which was introduced on 1 January 2014, is a failure. According to their research it "did not have any statistically significant and positive effects on youth employment probabilities".

The stated purpose of the Employment Tax Incentive (ETI) Act is to stimulate youth employment levels and ease the challenges that many youth experience in finding their first jobs.

The Act introduced a tax subsidy, paid by government to businesses, for the first two years of employment of a new employee below 30 years of age. Businesses receive the amount as tax deduction.

Treasury claimed that the tax subsidy would create 423,000 new jobs of which 178,000 would be "net" new jobs that would not have been created without the subsidy. However, this new research establishes a "fairly precisely estimated 'zero effect'."

The authors compared the first six months of the tax subsidy to the three years prior. They conclude: "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 authors of this new research are Vimal Ranchhod and Arden Finn of the Southern Africa Labour and Development Research Unit, at UCT. Their paper is entitled ‘Estimating the short run effects of South Africa's Employment Tax Incentive on youth employment probabilities using a difference-in-differences approach'. The authors are not connected to Equal Education. We are publicising their work because of its importance and because it supports many of the arguments we made to Treasury before the introduction of the Act.

The authors show that the tax subsidy is potentially a very expensive government subsidy to businesses, with very limited impact. The authors give the example of a firm that was planning on hiring 50 youth anyway. It would receive R50,000 in tax relief for doing nothing differently. The question is then whether it would hire a 51st young person. If it did government would essentially be paying a firm R51,000 per month to hire one new young person at R4,000 per month.

The authors conclude:

"[T]he lack of effectiveness of the ETI has implications for the efficacy of policy from a public finance perspective... [I]f there is substantial take up of the incentive for employment that would have arisen even in the absence of the ETI, this represents a pure transfer from taxpayers to a subset of firms who are not doing anything differently. These transfers have opportunity costs, and it is difficult to believe that this is desirable from a policy perspective."

Before the Act was passed Equal Education made detailed submissions to Treasury explaining why it would fail. We argued that it amounted to nothing more than a costly subsidy to business. This new research reaches a similar conclusion: "What our results imply is that any decrease in tax revenues that arise from the ETI are effectively accruing to firms which, collectively, would have employed most of these youth even in the absence of the ETI."

This failing program was lobbied for aggressively by the DA and legislated into law by the ANC government.

The matric class of 2014 faces bleak employment prospects. Equal Education calls for the immediate scrapping of the Employment Tax Incentive.

Statement issued by Doron Isaacs., EE Deputy General Secretary, and Nombulelo Nyathela (EE Spokesperson, January 14 2015

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