Is the Youth Wage Subsidy Good in a South African Context

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Introduction:
The youth wage subsidy proposed by the national treasury has generated a heated debate in South Africa. This essay sets out to critically analyse this topic by exploring the merits and demerits of this proposal. This analysis will be conducted by firstly discussing the economic theory of the subsidy, and what it sets out to achieve. Furthermore the substantive credibility of whether the theory is applicable in the real world will then be discussed through various case studies, followed by an analysis of alternative proposals on the matter, and whether or not they could substitute the youth wage subsidy. Finally conclusions will be drawn as to whether or not the subsidy will help alleviate the unemployment problem in South Africa, and how it can be successfully implemented. Unemployment in South Africa is rife, and according to Burns et al. (2010: 16), “this problem should be addressed by policies that improve the absorption of labour into full-time employment, preferably in the formal sector.” Furthermore, the study has identified three main sources of unemployment in South Africa, Namely; weak economic growth, changing structure of employment in South Africa, and youth unemployment (Burns et al., 2010: 17). Although all three sources of unemployment are equally important to analyse, special emphasis will be placed on youth unemployment. Youth Unemployment:

The high rates of unemployment in South Africa are extremely concentrated amongst the youth. According to the National Treasury (2011: 13), youth unemployment in the country represents 72% of total unemployment, and every second person under the age of 25 does not have a job. According to DBSA (2011: 36), this high rate of youth unemployment is closely associated to the fact that the youth are not gaining the correct education from primary and secondary schooling, and are not gaining any work experience. Furthermore, because the South African labour market is already constrained, and because the structure has shifted towards more skilled labour, these unskilled and semi-skilled workers are in excess supply and thus unemployed (Burns et al., 2010: 20). It is therefore clear that there is an urgent need for an intervention to combat the high levels of unemployment in South Africa, focusing directly on the youth. There have been contrasting arguments as to which policy will benefit the country the most, but for the scope of this analysis, the wage subsidy policy will be further analysed. According to a recent study by Stats SA, more than 3.2 million South Africans between the ages of 15-34 are unemployed, which constitutes almost 72% of the total number of unemployed people in the country (DA, 2011: 3). There are multiple reasons as to why this number is so high- as mentioned above- along with another significant reason caused by the extremely high cost of hiring labour in South Africa. It has been stated that due to this high cost, “4.5 million job seekers fail to find work each month” (DA, 2011: 6). The proposed youth wage subsidy is aimed at decreasing these excessive hiring costs, and therefore alleviate unemployment. Economic theory behind the youth wage subsidy:

Wage subsidies are in essence incentives that aim in creating more jobs in the work place, by lowering the cost of hiring additional employees, and/or increase the wages for the workers themselves (National Treasury, 2011). Thus, subsidies can be supply-side targeted, in which workers receive higher wages, or demand-side targeted, where the subsidy decreases the cost of hiring for firms. According to the National Treasury (2011), a demand- side subsidy approach will be the most beneficial for South Africa. The way in which wage subsidies decrease unemployment will now be discussed through a technical explanation: Diagram 1: Diagram 2:

(National Treasury, 2011: 29)
The theoretical way in which subsidies...
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