Briefing on the Youth Wage Subsidy: Specific Questions:

Transcription

1 19 May 2012 Tim Harris MP Briefing on the Youth Wage Subsidy: The DA fully supports the implementation of the Youth Wage Subsidy outlined in National Treasury s document Confronting youth unemployment: policy options for South Africa published in February This is the first time a policy has been: Announced by the President (State of the Nation, February 2010) Funded with R5bn in the 2011 National Budget Given an implementation date of 1 April 2012 and yet blocked by Cosatu who are refusing to discuss it at Nedlac Treasury has estimated that the policy would result in the creation of new, full-time jobs without affecting wage levels or conditions of employment. It will help young people get work experience. This is important because research shows that the longer a first-time jobseeker remains unemployed, the less employable he or she becomes. Specific Questions: 1. What is the situation with youth unemployment? 3.2 million people between the ages of 15 and 34 are unemployed. Roughly 70% of unemployed South Africans are between the ages of 15 and 34 Youth unemployment stands at 51%, and around 60% if discouraged work seekers are included In the last year, the unemployment rate for 18 to 29 year olds has increased by 8.8%. 2. How will the wage subsidy work? New workers between the age of 18 and 29: a two year subsidy for new workers earning below the personal income tax threshold (assumed to be R per year) for new workers the first year subsidy is 50% of the wage up to R before tapering to zero at R the second year subsidy for new workers functions as an existing worker subsidy, as detailed below Existing workers between the age of 18 and 24: a one-year subsidy to workers earning below the personal income tax threshold (assumed to be R per year) 1

2 for existing workers (which includes the second year subsidy for new workers) the subsidy is 20% of the wage up to R before tapering to zero at R This design minimises substitution of existing workers, maximizes efficiency and job-creation impact, and targets low-skill jobs where youth unemployment is highest Pay-outs are made as tax deductions through the Pay as You Earn (PAYE) tax platform Small firms, whose employees operate below the tax threshold, will not be registered on PAYE. They would receive cash pay-outs rather than tax deductions Government is not eligible to access the subsidy 3. Won't business just use the subsidy to substitute old workers with cheaper young workers? Substitution will be very limited. For two reasons: Labour law prohibits such retrenchments and will remain fully in place. Whenever an employer wants to retrench or fire anyone, they need to be able to justify it in terms of the Basic Conditions of Employment Act. There is little business sense in replacing good experienced workers who have demonstrated their productivity with inexperienced, young workers whose productivity is unknown simply to gain a temporary benefit. 4. Corporate South Africa is sitting on R520 billion in cash. This could be ploughed into new products, services and business that would create jobs. Why do they need tax incentives? This is a red herring: corporate cash holding are not linked to this tax break. There are two issues here: South African companies make a decision whether to invest based on the return they can get on their money and the risk associated with that investment. Right now policy uncertainty from government result in low business confidence and lower the perceived returns of investment. Cash reserves have nothing to do with the decision to hire more workers. The Youth Wage Subsidy is a tax incentive targeted at young jobseekers. It is only available to a business if they hire one or more young jobseekers on a full-time employment contract. 2

3 5. How many young people will benefit and how many new jobs will be created? National Treasury estimates that, in three years: young people would benefit from this policy (i.e.: their wages would be subsidised) of these would already be in jobs or would get jobs that would have been created even without the subsidy (economists call the dead-weight loss see Section 10) That leaves new jobs that would be created by the subsidy Of these would be sustainable, long-term jobs This is only a 3-year pilot project. A DA government would increase the funding for the subsidy that would result in more jobs being created. Even if a job does not last beyond the subsidy period, research has shown that someone who has work experience is three times more likely to find work than someone without it. 6. Cosatu says we don t have the money to subsidise companies. Is the Youth Wage Subsidy a cost-effective job creation policy? Yes. Here is a breakdown of cost per job created for various government job creation initiatives: Youth Wage Subsidy: R Expanded Public Works Programme: R R9 billion Jobs Fund: R Industrial Development Zones: R Automotive Subsidies: R Which other countries have implemented wage subsidies and have they worked there? Around 48 countries have used some variation of a wage subsidy, including: Singapore: Singapore implemented a youth wage subsidy as the recession of 2009 struck and managed to avert serious job losses United Kingdom: Youth unemployment fell by between 5 and 11%. Chile: jobs created in five years Argentina: 50% of participants in the programme became permanently employed 3

4 8. The wage subsidy in DA policy is quite different to this Youth Wage Subsidy. Why? Because of South Africa s stubbornly high unemployment rate, driven by the high cost of hiring relative to investing in capital, our party has supported a wage subsidy for the last 10 years. While we have proposed various designs over the years, we are now fully behind National Treasury s proposal 9. Doesn t this policy compromise the principle of equal pay for work of equal value? Youth receiving the subsidy would receive a full wage. A certain section of the wage would just be subsidised by the government, whilst the employer pays the rest. From the perspective of the worker, he or she would receive a full wage and would have the exact same conditions of employment as other non-subsidised workers. 10. This proposal has a high dead-weight loss. How can we still support it? (Note: A dead-weight loss occurs when existing workers, or workers in jobs that would have been created anyway, are subsidised. It means that some employers receive a subsidy even though they don t create any jobs. This represents a loss for government.) A dead-weight loss is an acceptable cost for the creation of new jobs for young people: It will eliminate the substitution of unsubsidised young workers with new subsidised young people. Even with this loss factored in, the cost-per-job remains much cheaper than other alternatives (see Number 6). 10. How does the wage subsidy in the Western Cape work? The Western Cape equivalent of the youth wage subsidy is called the Work and Skills for programme It facilitates youth employment by providing young people with opportunities for on-the-job training, drastically increasing their chances of finding jobs down the line. It targets people between 18 and 35 with matric or an equivalent level of education get six months of work experience A R1000-per-month stipend is paid directly to the worker to supplement their salary The objective of the programme is for 80% of workers to be retained in employment Since 2009, 2500 young people have benefited. Examples of employers: Prestige Clothing, Radisson Blu Hotel, Shoprite and the CTICC 4

5 Provincial governments have very little money for economic development because it is a national competence so national government receives the tax money in this area This leaves the province with only R9m to spend on the subsidy per year If we were in power at national level we would implement the Youth Wage Subsidy as designed by Treasury 11. What are the regulatory issues that drive up the cost of labour in South Africa? Several factors increase the cost of hiring: Wage costs: minimum wages are negotiated at bargaining councils dominated by big businesses and agreements are extended to all businesses in the sector, many of whom can not afford to pay as much. Non-wage costs: - Unemployment Insurance Fund (UIF) payments - Skills Development Levy (SDL) payments - Workman s Compensation Fund (WCF) payments Compliance costs at CCMA General compliance with labour laws (Basic Conditions of Employment Act, Labour Relations Act etc.) Additional sector-specific levies (see text box below) 5

6 Clothing sector specific levies Currently, formal employers in the clothing sector contribute eight different deductions from a worker s wages: Council Levies, Provident Fund contributions, Industry Protection Fund contributions, SACTWU bursary fund contributions, Contributions to the SACTWU HIV/AIDS project, Capacity Building Fund contributions, Collective Bargaining and Dispute Resolution Levies, and Payments to the Health Care Fund. These deductions add significantly to the total wage that the employer needs to pay whilst simultaneously lowering the percentage of that wage that actually goes to the worker s pockets. In so doing they make wages relatively more expensive and as often simply act as a non-wage tax on employment. In addition, they fail - most of the time - to add real value to employees who are forced to sacrifice a certain portion of their income to these schemes. By reforming and simplifying the structure of deductions, and scrapping most of the unnecessary deductions, significant cost cutting can be achieved for both the employee and the employer. In fact, it is possible that employees would be able to take more money home, even as their cost to company decreases. 12. Should government be focussing on education, training and skills development instead? Education and training is critical, but we also need demand-side measures, like this subsidy, to tackle unemployment. The youth wage subsidy is not a silver bullet and we have many other proposals to tackle unemployment: Scrap the SETAs and reimburse employers for approved training Roll out a nation-wide apprenticeship programme Reform of labour laws for small businesses 6

7 Remove extension of collective bargaining to non-parties to improve flexibility in the labour market Create export-processing zones Introduce tax breaks to help small businesses 13. Shouldn t government focus on deregulating the labour market and scrapping minimum wages instead Labour market reform is a major priority of the DA because we need to make it cheaper and easier for South African companies to create jobs. Our proposals are targeted at small businesses that find it especially hard to comply with regulations and to pay wages they were not involved in negotiating. The Youth Wage Subsidy is important, however, because it will lower this cost of creating jobs for young people without affecting wages or the conditions of employment 14. What do you think of government s plan to revise the Youth Wage Subsidy plan by the end of June and hand it to the Economic Development Department to implement as part of a broader youth unemployment strategy? National Treasury should implement the plan because they have a track record of successful implementation. The Economic Development Department has a track record of writing pie-in-the-sky plans, not policy implementation Minister Patel s was a senior Cosatu leader in his former job and will now be in charge of implementing a plan opposed by Cosatu The proposed reforms will water down the policy and mean it will create far fewer jobs: Unions and bargaining councils will now have the power to block the implementation of the wage subsidy in each industry. Each business can only add a limited number of subsidised workers. (One subsidised worker for every five existing workers) 15. What are our action steps to put this issue on the forefront and pressure government Cosatu to make it happen? Helen Zille will ask to address NEDLAC on the importance of this policy Helen Zille will seek a meeting with President Zuma to ask him to implement the policy DA delegations will be visiting Youth Wage Subsidy success stories in the Western Cape Lindiwe Mazibuko will drive the issue in Parliament We will launch a massive campaign to inform hundreds of thousands of South Africans of the benefits of the policy Each of our provincial structures will drive this issue in their constituencies 7