Gordhan: Youth wage subsidy will continue

Pravin Gordhan
Pravin Gordhan

The controversial employment tax incentive (ETI) would be renewed next year, Finance Minister Pravin Gordhan promised on Tuesday.

At a Johannesburg Chamber of Commerce and Industry breakfast event, the chief financial officer of Servest, Peter Walsh, asked Gordhan for clarity on the subsidy, saying that his company had claimed it for 17 000 employees since it was implemented at the beginning of 2014.

Gordhan replied by saying that the ETI would be extended, but that its effects were being studied with a view to possibly changing how it works.

The ETI provides a subsidy of up to R1 000 a month to employers of people aged between 18 and 29 earning less than R6 000 in their first formal jobs.

This falls to R500 in their second year on the job and falls away in the third.

It effectively introduces a two-tier labour market that makes young workers cheaper without actually reducing their wages.

It cost double its R1 billion budget in 2014 and another R1.9 billion in the first half of last year.

Despite evidence that it has significantly padded the profits of employers in the low-wages service sectors, including labour brokers, there still isn’t any reliable evidence that it has affected the labour market much.

Talking to City Press this week, Walsh, however, defended the ETI, saying it has “absolutely” changed the hiring practices at Servest.

“It is a tax incentive, so obviously there is a benefit for us ... We are not ashamed of that. I don’t think Treasury was ever under the illusion that this is not the case,” he said.

If the ETI fell away, it would be a “fairly significant speed bump” for Servest’s finances, said Walsh.

“It absolutely won’t put us out of business. The bottom-line effect would probably be 10% to 15%. It would make us reassess our spending on training.

“The question is often asked if it has impacted the level of unemployment. But that is not the right question,” Walsh said.

“The right question is whether it has impacted that segment [of the labour market], which is difficult to isolate.”

According to Walsh, Servest now tends to hire people who qualify for the ETI whenever a post opens up or a new contract gets signed.

“We employ about 28 000 people in South Africa – mostly in cleaning, security and landscaping,” he said.

“By the nature of what we do, we can take someone off the street and train them to be a cleaner, a gardener or a guard. These are fairly low-skilled jobs.”

While the ETI did not lead to an increase in employment, it led to the jobs on offer going to the target population, he said.

However, he said that Servest did not previously look at the ages of its workers, so he could not supply actual comparative numbers of how its workforce changed to reflect the ETI’s targets.

“There is no doubt they have become younger,” he said.

Of Servest’s 28 000 employees, 10 000 are currently in the eligible age and wage range.

That is after the ETI had been claimed for a total of 17 000 Servest workers since the beginning of 2014.

Some of them left the company after a month and some after a year, he said.

The ETI is not just free money and comes with its own difficulties, said Walsh.

Targeting young, inexperienced workers leads to a higher level of churn, he said.

“Before, we could get experienced unemployed people.”

Walsh also said that a “significant portion” of people hired on the ETI stay employed after the benefit falls away.

“What I stand by is that we do not fully understand what the implications have been. We’d like to be part of the process to see what it looks like going forward.”

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