South Africa’s Employment Tax Incentive: Can a wage subsidy tackle the world’s third highest youth unemployment rate?

30 September 2014

South Africa faces the third highest youth unemployment rate in the world, due to high labor costs, a massive skills gap and vulnerability. The Employment Tax Incentive (ETI) is a wage subsidy scheme meant to incentivize firms to hire more young people by offsetting the cost.

Development Policy Research Unit (DPRU), University of Cape Town

JustJobs Network
This report was featured as a chapter in ‘Overcoming the Youth Employment Crisis : Strategies from Around the Globe‘, a joint report co-authored by the global partners of JustJobs Network.

Youth unemployment in South Africa has reached a critical high. At 52 percent, the country faces the third highest youth unemployment rate in the world, only behind Spain and Greece. Almost 72 percent of unemployed South Africans are under 34 years of age.

In terms of human capital, only 14 percent of young people hold tertiary degrees4 – one of the best assurances of employment5 – and those obtaining Further Education and Training (FET) often face a skills mismatch that renders them unemployable in sectors that offer high-quality jobs. Meanwhile, demand-side issues exacerbate labor market woes for youth, with too few employers looking to hire young people.

South Africa faces the twin challenge of implementing structural reforms to enable better labor market outcomes for its young people over the long-term, while at the same time getting a large number of youth into jobs immediately. Ensuring sharper alignment of skilling programs with labor market demand and removing barriers that prevent the growth of small businesses is critical in the long run. However, the current social epidemic must be addressed, too, with policies that have a quicker turnaround. The scale of joblessness among youth is seen as a potential threat to social and political stability.

As a response to this youth unemployment challenge, the government of South Africa passed the Employment Tax Incentive Act (ETI) in 2013, a firm-side subsidy aimed at encouraging employers to hire youth. This subsidy could complement other policies targeting unemployment such as the Expanded Public Works Program, which created 3 million jobs between 2009 and early 2013.

This chapter analyzes the specific challenges that youth face in the South African job market and assesses the ETI as a strategy for tackling those challenges. It tracks early indications of the degree of success the scheme may achieve in helping young people access better quality employment. Further, the chapter considers how the youth wage subsidy must be part of a larger youth job creation strategy and proposes steps forward to ensure the sustainability of the program’s impact.