A note on the Youth wage tax incentive

2013-10-18 16:03

So the draft Employment Tax Incentive Bill currently being dissected in Parliament is receiving strong opposition from the unions and persistence by the DA. But what can I say? Youth unemployment is appalling. The quality of education and lack of skills is absolutely outrageous.

Originally I thought it wasn’t a great idea. I was duped to believe that unsubsidized workers would be replaced by subsidized workers. Now I realize that claim is flawed, bound by labour laws, the Bill itself, and the fact that it is not at all rational for a company to replace their skilled and experienced workers with low- or unskilled and inexperienced workers.

And then I thought. Using the word “incentive” instead of “subsidy” makes for a good policy. It “rewards” companies for employing young and inexperienced people, as opposed to handing companies a lump sum. Obviously companies are less prepared to employ an inexperienced worker, and therefore the desired wage they would be willing to pay would be relatively less. Surely it makes business sense to subsidize the wages of, and lower the cost of employing young workers, especially if companies are reluctant to.

But upon closer inspection, I still don’t think it’s a great idea. It’s a quick-fix to a structural problem. The efficiency loss has to be considered. In other words, would companies employ young people without the wage subsidy, through graduate programmes, internships, apprenticeships, learnerships and experimental training, thus making the policy useless? If companies do not employ people, young people in particular because of a lack of skills and inexperience, then why would those companies suddenly start employing young people because the cost of employing them is lower? The cost of employing young people can be a major benefit for companies, but would the relatively low cost of employing young people and its responsiveness to the demand for inexperienced labour really have a significant impact on youth unemployment?

For me, the underlying problem is the state of the education system and the quality of education, skills development, small business development and compliance, a lack of entrepreneurial innovation, labour market rigidities and a lack of flexibility in the wage determination by business, and significant tensions between labour and business.

We don’t need another tax incentive. We don’t need to create further distortions, complicate tax administration, erode the tax base and exacerbate the distributional implications of the tax burden. It’s business as usual. Business will be business. Business will not submit to Government because we have a youth unemployment crisis. We need a concrete solution addressing the underlying problem.

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