UN, Africa Development Bank back youth wage subsidy

As SA grapples with the idea of a youth subsidy, an international report has recommended providing firms with such incentives to hire young people.

But these must be designed to avoid negative side effects and the displacement of workers, according to the African Economic Outlook 2012 report.

Unemployment rates among young South Africans has soared to double the national average, hitting 50.5% in 2010, according to the report.

The problem is prevalent across the continent, where unemployment rates among people aged 15 to 24 are hitting all-time highs.

Young people make up 60% of Africa’s unemployed adults.

Co-written by the African Development Bank, the OECD Development Centre, the United Nations Economic Commission for Africa and the UN Development Programme, the report was released in Arusha, Tanzania on Monday.

“In some countries direct or indirect incentives are offered to companies in exchange for recruiting young people: employers are given funds that cover a part or the whole of the salaries of young workers, as well as other financial advantages such as social security waivers or reduction in labour taxes,” the report noted.

“This programme allows employers to narrow the gap between the presumed low productivity of inexperienced young workers and real wages.”

But it warned of side-effects – including “deadweight loss”, where a subsidy is paid to an unemployed person who would have been hired in the absence of the programme – or substitution effects, where jobs created for the target groups replace jobs for other groups.

Opposition to a subsidy

Introducing a youth wage subsidy has been widely criticised by labour unions, and most recently sawCosatu supporters try to stop a march by members of the Democratic Alliance, who were protesting against the union federation’s opposition to the subsidy two weeks ago.

Despite positive growth across Africa, this has not translated into sufficient jobs for young people.

“Growth alone, while important, is not sufficient in itself,” said Mario Pezzini, the director at the OECD Development Centre, at the launch of the report.

Africa’s young population is growing, representing a labour force of about a billion people by 2045, and is also increasingly better educated.

Pezzini pointed out that if this talent is not used appropriately, high levels of unemployed youth on the continent will pose a significant threat to social cohesion and political stability.

The lack of economic activity was the largest obstacle to employing youth, according to Pezzini.

“Africa needs more job creation; this would mainly come from small- and medium-sized firms,” he said.

Even with jobs, poverty endures

But while work is assumed to be a panacea for young people, the report pointed out that many with jobs remain poor.

“Working poverty, vulnerable employment and underemployment abound … and across all occupations,” it said.

The problem is particularly acute in low-income countries where many young people may be employed, but remain poor, as jobs are insecure and poorly paid.

In middle-income countries, however, there were not enough jobs being created for the number of young people entering the job market.

A thriving private sector is the most important factor needed to employ young people.

Both small and large private firms were the only viable option for large-scale job creation, it noted, and both needed support to grow and create jobs.

Education isn’t the problem

While labour regulations are often perceived as an impediment to job creation, the research found that in sub-Saharan Africa electricity and finance, not regulation or education, were the biggest obstacles to firm growth.

Getting an electricity connection costs more on average in sub-Saharan Africa than anywhere else in the world, it said, while firms needed 137 days to get an electricity connection, double the time needed in Latin America or the Caribbean.

For large firms, indirect costs were some of the major challenges to their growth.

These included the cost of electricity, transport, communication, security, rent and bribes.

Labour market regulation does however become a problem for middle income countries.

International experience showed that employment protection legislation “can push employment from the formal to the informal sector and reduce turnover, thereby limiting opportunities for new entrants, i.e. young people”. In many poorer countries, however, tough labour laws on paper are not necessarily strictly enforced, because of low capacity levels.

Nevertheless they can deter investors.

“Foreign investors with limited knowledge of the local context in particular might be deterred by seemingly strict labour regulations that could increase operating costs if enforced,” it said.

When it came to small firms, Pezzini argued that the effects of the local environment they operated in should not be underestimated.

While they faced well-known challenges of access to finance and “being small they depend a lot on the available services and infrastructure that exist in the place they were”, he said.

The security of services to these firms was important both in urban and rural areas.

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