In his State of the Nation Address 2014, President Jacob Zuma, concedes that despite the achievements of the democratic government, South Africa ‘still faces the triple challenge of poverty, inequality, and unemployment’ (State of the Nation, 2014). This triple challenge of poverty, inequality and unemployment, is the democratic government’s biggest test to date. The arguments advanced in this paper move from the premise that to decisively reduce inequality and lift more people out of poverty; more people need to work. The persistent bleeding of jobs in South Africa remains the single biggest challenge faced by the democratic government. The failure of the economy to match the growing labour force to job opportunities is a structural and fundamental problem. However, to narrow the scope of such a broad approach, the paper focuses on youth unemployment as key weakness in the South Africa labour market.
Structurally, the paper seeks to achieve four objectives in four sections. The first seeks to expand on the development challenge of poverty, inequality, and unemployment as noted above. The second objective is to establish a link between the structure of South Africa’s economy and the development challenges noted. Thirdly, South Africa’s economy and labour market specifically throws up a range of complex risk patterns which are identified and discussed. The last section presents probable solutions to the youth unemployment crisis taking note of initiatives already in existence and others that could be borrowed from other developing countries.
In describing South Africa’s key development challenges; the World Bank (2013) reports that South Africa remains a dual economy with one of the highest inequality rates in the world, poverty remains deeply entrenched in many parts of the country, and widespread exclusion and unemployment remain stubborn challenges on the economic landscape. This description almost mirrors that of the South African government. In the latest report from the Presidency’s Monitoring and Evaluation Department (DPME) notes that when the democratic government took office it inherited a legacy of poverty and an unequitable distribution of income. The policies of Apartheid exclude the majority from labour market participation, serving the purpose of locking black South Africans in the clutches of poverty (DPME, 2014).
Given the degree to which Apartheid policies were entrenched, the process of reversing them is at best an incomplete one. Although overall GDP per capita income has risen since 1994, inequality has not followed the same trajectory. At an income level, just over half of the country’s total national income is attributed to the richest 10% of households. On the other end of the spectrum, the poorest 40% account for just over 5% of total income (DPME 2014). The charts below puts South Africa’s inequality in context with a comparison amongst its BRICS peers and give insight into the in-country dynamics of the skewed nature of household income.
In essence, the share of national consumption between the richest and the poorest remains stubbornly stagnant. When using the Gini-coefficient measure, inequality increased from 0.64 in 1995 to 0.69 in 2005, although it did improve to 0.65 in 2010/11 (DPME 2014).
The government has responded to the plight of those in the bottom 10 percent of the income distribution pyramid through a social grants system. Although inequality remains high, the democratic government has made some progress towards alleviating poverty. There are numerous studies that propose different methods of measuring poverty. Despite, there is relative acceptance that the absolute number of people living under the poverty line has declined. This is largely attributed to a tax-based redistribution strategy. The graph below extracted from the World Bank’s World Development Indicators confirms this.
While social grants in South Africa have had the impact of alleviating poverty for this part of the population they have had no contribution towards reducing inequality. Inclusion can only be created through active participation in the economy. Ultimately, the labour market lies at the centre of the country’s challenges of poverty and inequality.
UNEMPLOYMENT IN SOUTH AFRICA
According to Statistics South Africa (Stats SA); South Africa’s unemployment rate as recorded in the fourth quarter for 2013 is 24.1%. Stats SA also notes that unemployment levels have been fluctuating as reflected by their quarterly Labour Force Survey. Despite the fluctuations the data shows a strong upward trend. In the period between 2008 and 2013; the lowest level of unemployment was in the fourth quarter of 2008 observing 3.9 million unemployed people and the highest was observed in the second quarter of 2013 recording 4.7 million unemployed people (Stats SA Quarterly Labour Force Survey).
According to economists, unemployment arises when the supply of labour exceeds the demand for labour. This oversupply of labour is described as a failure of the market to clear or to ‘reach equilibrium’ (Nattrass 1996: 17) The South African scenario is no different. From the supply side; the actual number of people entering the labour market and are looking for work has risen sharply. The number of people in with little or no skills is also very high because of the historically low investments in education and persistent challenges to education.
On the demand side; South African firms are undergoing a ‘skills-biased technical change’ which increasingly calls for skilled rather than unskilled labour (Nattrass 1996: 22). In South Africa the unabated move towards mechanization in the mining sector is a prime example of this change. We unpack the changes in the economy and the labour market in detail later.
As a point of departure on this note it is important to note that to decisively reduce inequality and lift more people out of poverty; more people need to work. The structure of South Africa’s economy, and particular the labour market, is a big driver of inequality (May, 2000). May goes on to explain that in South Africa wage income accounts for 70% of total income and makes a contribution of 85% to income inequality. These numbers are best reflected in the inequality that exists amongst wage earners. The labour market is going through a change that increasingly demands high-skill workers (attracting high skill wages) at a faster pace than lower-skilled workers. At least a third of wage inequality is directly linked to the large share of households that have no workers and therefore have no wage income (DPME 2014). Pervasive and structural unemployment is the primary explanation for the high number of households that find themselves at the bottom of the income distribution pyramid.
SOUTH AFRICA’S TIPPING POINT: YOUTH UNEMPLOYMENT
As indicated, the focus of this paper will be narrowed down to the challenge of youth unemployment. To effectively take on this it is useful to begin with definition of the concepts of ‘youth’ and ‘unemployment.’ The paper adopts the definition espoused by the World Bank on youth unemployment which is: ‘the share of the labour force aged between 15 and 24 without work but available for and seeking employment’ (World Bank Development Indicators 2007). However, countries have been found to use their own definition of youth depending on cultural, institutional and political considerations. South Africa’s National Youth Policy (2009-2014) defines the youth age group as being between the ages of 15 and 35 years old. The motivation for the expansion of the age group range is based on historical political imbalances citing that the fruits of democracy have not as yet reversed these imbalances (National Youth Commission act no 16 of 1996). Interestingly, in policy positions the South African government differentiates between 15-24 year olds and 25 -35 year old. This differentiation is useful to the extent that it does allow for some comparison along international benchmarks.
Definitions aside; South Africa has a youth unemployment crisis. When compared with its emerging market peers this crisis is glaring. If the employment ratio, which is the proportion of the working age population, is taken into consideration, South Africa falls short of its emerging market peers especially within the BRICS bloc (Blumenfeld 2012). In China, employment attracts 71% of the working age population, 65% in Brazil which slightly above Russia’s 57’% and India’s 55%. These numbers are a stark contrast to South Africa’s 40.8%. Outside of the BRICS comparison, according to Blumenfeld (2012) the average employment ratio across 19 emerging markets is 56%. This picture worsens when the youth segment (15-24 year-olds) is honed in on. South Africa’s youth employment ratio is 12.5%. This means that one in eight young people in South Africa are employed, this compared with 36% across emerging markets (Blumenfeld, 2012).
There are a number of considerations that must be made when taking on the youth unemployment crisis in South Africa. In addition to the employment ratio referred to above, the participation rate is important and is often referred to as the expanded or inclusive definition of unemployment (Ozler, 2007). This is the proportion of the population that includes job seekers who are currently unemployed but consider themselves as part of the labour force. The numbers show that South Africa’s youth participation rate also lags behind the emerging market average of 42% coming in at 24.4% (Blumenfeld 2012; Ozler 2007; Bhorat 2001). Simply put, three out of every four young people do not regard themselves as part of the labour force.
These numbers bring meaning to South Africa’s exceptionally high unemployment rate. Even when the number of ‘discouraged workers’ are stripped out of the equation, the total unemployment rate hovers at 25% of the labour force. On the expanded or inclusive definition noted above, the unemployment rate is closer to 40% according to Blumenfeld (2012).
Altman (2007) argues that the number of unemployed young people is growing at a faster rate than any other group, fuelling the unemployment rate each year. Bernstein (2008) goes as far as arguing that the only fact that improves the employment prospects for young people is age, in other words, getting old. Young people in South Africa are literally queuing for work with opportunities after finding it as they get closer to 30 and older.
The latest data from Statistics South Africa captures the severity of the youth unemployment crisis in South Africa well and is represented below (Stats SA: Quarterly Labour Force Survey).The data in the figure below represents the number of unemployed people by age.
If we adopt the South African definition of youth (15-34), the data shows that South Africa is sitting with a youth unemployment crisis. These are young people that should ideally be economically active, supporting older relatives and/or families. How this problem is interpreted and understood is important and has policy implications. Altam (2007) notes that it is imperative that a distinction between policies that are designed to respond to a mismatch between skills and opportunities emanating from poor labour market information or from suppressed demand. We delve into these policy considerations later.
SOUTH AFRICA’S POST-APARTHEID LABOUR MARKET
The labour market that the democratic government inherited has been subject to structural and technological changes (Bhorat, 2003). At a structural level the labour market was moving away from output from the primary sectors in favour of output from the services sectors. From a technological perspective the changes saw a strong capital bias away from labour-intensive industries. The impact of these two changes has been an increase in the demand highly-skilled workers in addition to significant attrition rates at the bottom end/low-skill end of the labour market. In addition to these changes, South Africa’s post-Apartheid labour market coincides with an era where economic growth has been comparatively poorer. Inevitably, this has added to the unemployment crisis. It is important to note at this juncture that despite political rhetoric that argues that South Africa is characterized by ‘jobless growth’, this is in effect not true. More accurately, the growth in unemployment has been outpaced by the growth in the labour force (Bhorat 2003; 6).
Another structural change that contributed to the rise of unemployment in South Africa was the decline of the gold mining industry (2001). Mining and manufacturing hemorrhaged jobs heavily even though other parts of the economy, notably commerce, finance, real estate, business services, and the public sector grew. This growth was not sufficient to cancel out the losses in manufacturing and mining.
It is important too, to understand the rise of unemployment in South Africa, to fully appreciate the contemporary short comings of the labour market. Until the mid-1970’s South Africa, much like other Sub-Saharan African countries, experienced labour shortages. Nattrass (1996:46; 2001) notes that in response to this challenge the South African government used coercive measures to ensure cheap labour to meet the demands of industry, mines, and commercial farms.
Development driven by gold revenues and foreign capital ensured a consistent flow of labour away from traditional agriculture in favour of rapid urbanization (Nattrass 1996:46; Stander 1996). But this growth ground to a halt in the mid-1970s when the gold boom burst and effectively lost its luster. By the late 1970s unemployment had taken hold such that by 1994, one third of the African labour force was simply unable to find work.
From the mid-1920s South Africa’s industrialisation strategy mirrored that of Latin America with a strong inward focus. Initially, this strategy supported labour-intensive industries but slowly began losing steam by the 1960s. Unlike the East Asian economies, who at that time adopted a more outward-orientated export approach, South Africa closed in with heavier protectionist measures and a capital-intensive industry approach. These developments, together with negative real interest rates and large-scale strategic investments such as Sasol, made for a lethal concoction of rising capital intensity. The net result is that economy became increasingly more capital intensive at the expense of labour intensity.
The issue of employment creation is a hotly contested one in South African politics. Twenty years after democracy, it is still the election-dominating card, and the priority of national, provincial and municipal card. In fact, amongst the biggest and most visible political parties, the promise to create jobs is at the top of their election manifestos.
‘We have created 3.7million work opportunities over the past 5years’ ‘ Zuma, State of the Nation 2014 ‘The manifest we release today is a manifesto for jobs’ ‘ Helen Zille, Leader of opposition Democratic Alliance.
Without getting into the political semantics it is important to heed Bhora’s (2003) cautions that we must understand the absolute expansion of employment within context. More simply, the number of jobs that have been created must be understood against the number of new entrants that have come into the labour market over the same period. For example, between 1995 and 2002: 1.6million jobs were created. However, 5 million new entrants entered the labour market over the same period. The inability of the labour force to absorb new entrants in addition to the graduate unemployment problem work together to create a scenario where unemployment is closely correlated to age. We turn to the labour market and youth unemployment next.
THE LABOUR MARKET AND YOUTH UNEMPLOYMENT
The structural causes of youth unemployment in South Africa are numerous and multifaceted. In line with most countries, irrespective of the stage if development and/or industrialization, young people have lower access to the labour market than the adult population (Mlatsheni, 2002). South Africa is not exception in this scenario with a comparatively higher rate of unemployment amongst young people, as argued earlier by Mlatsheni (2002) and supported by Altman (2007).
Furthermore, Altman (2007) explains that youth unemployment in South Africa is unevenly spread along racial lines. Young black people have an unemployment rate of 70% as a racial group compared to 12% of young white people. These variations are also true for gender differences with 63% of economically active women being unemployment to 53% of men being unemployed.
The literature consulted concludes that the roots of this crisis are: ‘aggregate demand, youth wages, the size of the youth labour force, and the lack of skills amongst the youth’ (Mlatsheni 2002; Altman 2007; Bhorat 2001; ILO 2006).
The employment deficit amongst young people creates risk patterns that go beyond the unemployed individual but have a broader impact on the society too. The risk patterns that emanate from the labour market are discussed in the section below.
South Africa’s labour market effectively locks young people out of work opportunities. Godfrey (2003) argues that the potential to increase youth employment is determined by (a) the strength of the demand for labour in general and (b) the extent to which young people are able to integrate themselves into economic processes such that when the overall demand for labour increases, they are in a position to benefit form that upward cycle. Simply put, unless demand or labour broadly is on the rise, interventions to increase youth employment are unlikely to be effective either. Therefore, risk patterns that reinforce inaccessibility of the labour market should be the starting point of any policy formulation process.
Growth and fiscal stability
The effect of young people’s exclusion from the labour force is that they are unable to acquire the skills and experience necessary for the economy to grow. McCarthy (2008) states that has a direct bearing on the country’s economic growth potential and also imposes a larger burden on the state to provide social assistance to a growing population. Ozler (2007) also contributes noting that the long-term viability of the fiscal system in addition to an effective social security system are shaken when the tax base is thin and the real number of tax payers is low.
Labour market failure
Labour market failure is one of the key reasons why young people may remain locked out of the labour market. Labour market failure arises from poor information about the type of work available to young people and the related wage returns associated with such opportunities. In addition to this the problem of perceived risk by employers as relates to young and inexperienced workers heightens the barriers to entry (McCarthy, 2008).
The unemployment of young people is particularly sensitive to changes in aggregate demand in comparison to the adult population. Simply put, the demand for work amongst young people is lower than that of the adult population. Further, one of the first responses to a recession that the typical firm has is to stop recruitment. The impact of this decision is bigger on the young labour force than the adult population (Nel, 2001). The same approach applies when firms take a step further retrenching workers. Young people are most often the first casualties of such actions. Young people are also up against the experience trap when trying to enter the labour market. Their lack of on-the-job experience effectively locks them out of opportunities that demand some degree of experience by employers (McMcarthy 2008; Nel 2001)
Credit market failure
The formal credit market often locks out young people. Godfrey (2003) explains that this exclusion is directly linked to the uncertainty of lending to ‘beginners in business’ in addition to information asymmetries that may occur.
Credit market failure is a significant risk patter because if perpetuated it effectively makes access to credit relatively difficult for young people.
Location-related market failure
Location-related market failure is an important risk pattern that is characteristic of young people in rural or remote areas in South Africa. For these young people, outside of the urban areas or city metros, access to employment or entrepreneurial opportunities are limited (Marais 2011; McCarthy 2008). This risk pattern arises from poor infrastructure, lack of information, market thinness, and other variables that influence their access to the labour market because of their geography.
Training systems failure
Training systems failure is evident when there is a misalignment between the skills that young people possess relative to the skills required by expanding sectors. In most instances, poor information leads to a poor understanding of the skills required by the economy. Further, where this understanding does exist, financing studies to attain those skills is yet another hurdle that must be surpassed.
The poor alignment between the outcomes of the education system and the needs of the economy and in particular industry, creates a mismatch between the demand and supply of labour (Bell & Blanchflower, 2010) argue that employers consider entry level wages to be too high relative to the risk of hiring inexperienced workers.
Labour regulation failure
Labour regulation can reinforce the impenetrability of the labour market for young people by creating high entry barriers. Economists suggest that when there is overall low economic growth and a subdued investment rate, wage rates become the prime suspect responsible for unemployment. At this heart of this debate is the undeniable fact that the relationship between productivity and the cost of labour is a strong factor for employers when deciding whether to take on more workers or not (Bell & Blanchflower, 2010).
In a working paper published by the IMF, Blumenfeld (2012) looks at the reasons behind South Africa’s high job hemorrhage between and 2010, draws the following conclusions: there is a weak relationship between real wages and labour productivity in South Africa. In other words; real wage growth in South Africa is driven less by productivity levels and more by ‘other factors that delink it from labor market conditions.’ More so, the South African situation has been characterized by real wage growth that has outpaced labour-productivity growth. It is the manifestation of the above relationship that led to South Africa shedding an excessive amount of jobs, almost 25%, during the economic low down of 2008 to 2010. The paper concludes that amongst other factors, entry restrictions, employment protection legislation, and the collective bargaining framework all contribute to the misalignment between real wages and labour productivity (Blumenfeld 2012). Therefore, it can be inferred that the same fate falls onto young people when they are effectively priced out of the market because of labour legislation. When the cost of labour is perceived to be too high because the immediate effect is a regression in the pace of job recreation.
The World Bank also supports this view noting that ‘high firing costs reduce layoffs, as well job creation in firms, making access to employment difficult for new young entrants to the job market’ (McCarthy, 2008).
The psyche of unemployment youth and discouraged job seekers
When young people struggle and fail to secure employment in the early years of their potential working life; can lead to a higher probability that these job seekers may become discouraged. Most importantly, the higher the rate of youth unemployment, the higher the probability that large numbers of workers will become discouraged ultimately disengaging from the labour force altogether (Burns et al, 2010). Linked to this is the reality that the longer young people stay without employment, the more they are locked out of the opportunity of amassing human capital, a key variable in determining living standards. Taken together these two factors make long-term integration into the labour even harder.
Studies have also shown that young people unable to secure employment or at the very least a productive role in society, are more vulnerable to anti-social behavior (McCarthy, 2008). South Africa is no different from evidence obtained from the United States, France, Sri Lanka and more recently Egypt that all suggest that youth unemployment can lead to increased crimes rates, incarceration, and political upheaval.
DEVELOPMENT FINANCE INTERVENTIONS
Youth unemployment is not a neglected area of concern in South Africa. The number of interventions, failed or successful, initiated by the government and within the framework of public-private-partnerships (PPPs) is evidence of this. What is clear is that, based on the risk patterns discussed above, the primary objective of any policy or development finance intervention should be to increase the integration of young people into the labour market. The development finance interventions discussed from hereon will therefore aim to (a) counteract market failure, (b) optimize labour market regulation and, (c) improve the skills of young people. Given that youth unemployment has been a central policy focus in South Africa some of the interventions are not new, but recommendations on strengthening for greater impact will be proposed.
Enterprise Finance for Youth Entrepreneurship
The encouragement of Small and Medium Sized Enterprises (SMMEs) is a key intervention to respond to youth unemployment. In particular, young people need better access to capital if they are to create ventures that have the ability to generate employment not only for themselves but others too. Easier access to credit is but one solution to create youth-owned enterprises.
One of the ways to boost youth entrepreneurs and counteract credit market failure is through the provision of subsidized credit to young entrepreneurs. Exclusion from access to credit occurs because of the perception that young people lack the required skills to run a profitable and sustainable business (Binns & Nel, 2000).
The Umsobomvu Youth Fund (UYF) is an example of a government intervention to address this problem. Established in 2001, the UYF is primarily focused on providing finance for start-up business and the expansion of existing youth-owned businesses. In addition to providing credit, the agency also offers business development services with the aim to bolster youth entrepreneurs through technical and managerial support for their ideas and businesses.
Unfortunately, the UYF has become a defunct organisation due to the high degree of corruption and maladministration.
This does not declare null and void the opportunity for a well-run organisation of this nature to be considered. In addition to access to finance and business development services, a similar organisation could also offer a combination of grants, subsidies, market-related loans, training, mentoring, incubation, and facilitated networking for youth entrepreneurs. This combination could redress credit market failure. Further, replication of the model in remote and/or rural areas could also address the location-related exclusions that arise from geography (Binns & Nel, 2000; Kingdon & Knight, 2001).
Finally, information to existing opportunities and subsequently being able to apply for those opportunities is a small but very important service that should be made more readily accessible to young people.
Youth Cooperatives: an under-exploited option?
According to the ILO (2006) it estimated that cooperatives account for up to 100 million jobs world-wide. However, how much of this figure is representative of young people is not quite clear. Cooperatives provide salaried employment and self-employment opportunities. Cooperatives overcome location related market failures thriving in rural and urban settings. In South Africa, cooperatives are not featured in the school curricula and therefore young people are often unaware of this option. Further, business development institutions such as the Umsobomvu Youth Fund and others exclude cooperatives from their funding ambit. The legislative environment does not lend itself to cooperatives either. The important contribution that cooperatives can make is the facilitation of the work-to-school transition providing on-the-job training and the requisite skills to increase their attractiveness to employers (ILO, 2006). The proposal then is that youth cooperatives are assimilated into youth enterprise funding solutions.
The Extended Public Works Programme
At a national level the Extended Public Works Programme (EPWP) is perhaps the prime example of a government intervention to take youth unemployment. Established in 2003 the objective of the programme is to offer income relief to the poor and unemployed. The EPWP has been adopted across all government departments and State-owned Enterprises. In its latest report for the 2013/14 financial year, the Minister of Public Works in South Africa attributed 3 million jobs to the programme (DPME, 2014)
The EPWP plays a very important role in providing income, short-term experience, and training. Granted, it may not be the ideal intervention for sustainable employment, but it does capture a notable number of young people that improve their chances of becoming economically active citizens.
However, Meth (2011) argues that the EPWP has failed to meet its objectives and falls short of its mandate because the essential component of training is often absent in many of its projects. The EPWP’s founding documents stipulate that for every 20 days worked, workers should receive at least 2 days training. The programme has been questioned on its inability to quantify the amount of training its participants receive, if any.
In addition to that there has been no real representation of young people in the programme despite this being touted by political leadership and the mandate of the programme itself. The programme is also criticized for mass maladministration and corruption (Meth, 2011).
So what do we do in the interim? What the government can do is to consider another development finance intervention that has the potential to counteract market failure as it relates to training. That is the provision of training vouchers. This approach already exists in Kenya as a scheme called Jua Kali (small enterprise). The scheme works by affording anyone who is eligible to training a voucher than can be cashed in for training voucher of their choice. The intention is to enable recipients to buy training on the open market. The effect of this is not only on the increased competition in the market amongst training providers but young people can effectively buy the skills that would improve their employability (Meth 2011; September, 2007). Further, if these vouchers are aligned with the expanding sectors of the economy, then misalignment of skills and work is also minimized.
Labour legislation: the appropriateness of the youth wage subsidy
Labour market interventions must serve the purpose of enhancing incentives for employers to hire, up-skill and train young people. The International Labour Organisation (2006) reinforces the need to review labour legislation in South Africa. When the cost of dismissing employees from work is high and thus reducing the number of layoffs in a firm, this has the effect of locking out new firms from that industry and reduces access to entry into the labour market for new young entrants. Stricter employment protection laws lead to lower wages and lower employment rates for young people. The debate about the effectiveness of labour legislation in South Africa is broad and complex. For purposes of this paper, we will only consider the debate as it relates to the youth wage subsidy.
The proposal for a youth wage subsidy in South Africa is not new and has in fact garnered significant political attention and debate amongst its supporters and detractors. The aim of this paper is not to get entangled in the political noise surrounding these policy option save to propose it as a viable option.
Burns et al (2010) captures the benefits of a youth wage subsidies in three simple arguments. First, subsidy would reduce the perceived financial cost, held by employers, about the potential young workers in relation to their potential productivity. Secondly, the subsidy can act as an incentive to encourage employers to train young workers. Thirdly, the subsidy is likely to encourage more active job searching because young people would believe that with effort it is possible to find work (Burns, 2010).
A youth subsidy alone will not solve youth unemployment but it can contribute to young people gaining work experience, accessing decent jobs in the formal economy, and improving their employment prospects in the long term. By bringing down the real cost of hiring young and less skilled people, reducing the risk associated with their employment, real jobs can be created for people largely locked out of the labour market(Burns, 2010; Schussler 2012).
Training is of course a vital component that must accompany the work experience of young people so that their productivity is enhanced and that they may remain in the employ of the company (or become re-employable) even when the subsidy expires (Burns, 2010; Schussler, 2012; Blumenfeld, 2012).
It is worth noting the pitfalls to a youth wage subsidy for the sake of a balanced argument. Employment gains can come at the expense of other workers who are effectively substituted in favour of those that are attached to a subsidy (Burns, 2010; Schussler, 2012; Blumenfeld, 2012). The ‘churning effect’ is also dangerous where a recycling of workers from one employment period to the next, in the absence of proper monitoring. The financing of a wage subsidy programme has obvious implications for the national budget. Additional revenue is likely to create additional taxation. Lastly, imperfect market conditions can undermine the impact of a youth wage subsidy. For example; a dominating firm in a particular industry may be able to capture some of the subsidy as rent. Where competitiveness is weak in a given industry, the wage subsidy incentive is also weakened (Burns, 2010; Schussler, 2012; Blumenfeld, 2012).
What is clear is that for a youth wage subsidy to be effective, careful consideration must be given to policy design and implementation. Whether the subsidization of wages will be a strong enough incentive for employers to take on workers that do not have the skills set required for their business remains a debatable point. At the very least a youth wage subsidy will allow young people that fall beneath the minimum skill bar an opportunity to be absorbed into the labour force.
Youth-focused exemptions: Active Labour Market Policies
Bell & Blanchflower (2010) propose that South Africa look to the Scandinavian countries as an alternative example where broad labour market deregulation is considered a politically impossible or unpopular move. Instead, more targeted interventions known as Active Labour Market Policies (ALMPs), can be adopted. ALMPs attempt to lower barriers to entry into the labour market. In South Africa the youth wage subsidy is but one example that could fall under ALMPs interventions, but this can be expanded to include exemption from labour market regulations, subsidies and/or credits to support young people to fund their job search, leveraging a development finance solution.
Education and Training Interventions
Training systems failures occurs when young workers and job seekers are unaware of the skills required by the expanding sectors of the economy. As with other kinds of market failure, the absence of information is the primary reason for asymmetry. McCarthy (2008) notes that ninety-four percent of young people that have completed a university degree in South Africa are employed or are continuing with their studies. The education analysis shows that graduates in law, physical sciences, business sciences, and engineering have the highest chances of securing employment. The faculties that show that their qualifications lead to fewer job opportunities are the fine arts and humanities, social sciences and health sciences.
The minimum requirement from employers in developing countries is basic literacy and numeracy (Godfrey, 2003). Reading literacy is particularly important in the labour market. Godfrey (2003) draws attention to the OECD’s 2000 report from its International Literacy Survey. The survey concludes that in the period 1994-1998, across 22 participating countries, people with higher levels of reading literacy are more likely to be employed and on average have higher wages than those with lower literacy levels. It can be concluded from this report and other supporting literature that the greatest variable that can positively influence the future employment prospects of young people is keeping them in school (Godfrey, 2003; McCarthy, 2008; Bhorat, 2001).
This raises important policy considerations that should be aimed at ensuring universal access to education and improving retention of young people in the primary to secondary school cycle. Targeted subsidies to address both these concerns can fall within the broader policy directive of improving access to educational financing as a development finance intervention.
Obtaining a grade 12 or Matriculation certificate falls sharply from being any sort of guarantee of a place in the job market. Further, young people who do not finish secondary school are twice as likely to be unemployed than to have a business or a job (McCarthy, 2008).
What is evident is that tertiary education is key to reducing youth unemployment. How then do we deploy a development finance perspective to this finding? Government and the private sector should have a concerted focus on ensuring that there are no financial barriers to education. The existence of the National Financial Aid Scheme (NFAS) is a step in the right direction but is largely insufficient in South Africa. With a paltry budget, a questionable lending model, and evident operational challenges, the NSFAS is never going to be the panacea for this challenge. However, the failures of the NSFAS to not negate the need for institutions that are established to finance individual skill acquisition. The key would be for these institutions to be structured such that they do not demand immediate collateral. In addition, they should advance loans to enterprises to develop training programs.
South Africa has attempted to fill the training vacuum through the establishment of the Further Education and Training (FET) colleges. This has proven to be a noble idea that has fallen short of its ambitious mandate. Concisely, FETs face multiple challenges such as a lack of clarity on the most effective programmes, funding, weaknesses in institutional governance, and an inability to equip trainees with direct links to the work place.
Low-cost housing finance
Isolation from the origin of opportunities is how location-related market failure is manifested. The solution to this would be to reduce isolation. Investment in and building of transport infrastructure in themselves are not youth specific interventions, but do contribute significantly to integrating young people into the labour market. Further, improving the road network often translates into a reduction of transport costs as young people go out in search of work.
The development of a housing market to ease the movement of families, which would include young people, is a strategy that has potential to counter location-related market failure. Development Finance could contribute to this strategy through the development of a low-cost housing scheme. The Department of Human Settlements has embarked on a similar programme namely; the Finance Linked Individual Subsidy Programme (FLISP). FLISP targets an income range of R3 501 to R15 000 per month supporting qualifying families with a once-off down payment provided that they have secured mortgage finance to acquire a residential property for the first time (DPME, 2014). Leveraging economies of scale for such initiatives is crucial if a real dent in youth unemployment is to be made.
Special Economic Zones
Special Economic Zones (SEZs) are commonly known as a tool to attract foreign (mostly) and domestic investment in exporting industries. The ‘special’ in SEZs can come in the form of tax incentives, free repatriation of profits, provision of infrastructure and even exemption from some elements of labour laws to the foreign firm. Developing countries, including South Africa, have latched onto the idea of SEZ and this has borne the fruit of creating jobs in clothing, textile, and light manufacturing industries. SEZs are particularly relevant for this discussion because they can lead to a fast creation of job opportunities for unskilled and particularly young people.
The state of Penang in Malaysia is one of the regions that has seen substantial employment benefit through SEZs, attracting large investments into the high-tech manufacturing industry. The number of manufacturing plants in Penang has increase from 31 in 1970 to 743 by 1997. In that period, the number of people employed has also grown from approximately 3000 to nearly 200 000 (ILO, 2006).
This paper has identified South Africa’s biggest development challenge as its ‘triple challenge’ of poverty, inequality and unemployment. Further to this the unemployment crisis has been singled out the toughest test to date over the past 20years for the democratic government. Although the notion of ‘jobless growth’ has been dismissed, the inability of the labour market to absorb new entrants has been the starting point for the discussion on youth unemployment that was pursed.
The youth unemployment crisis in South Africa is the country’s tipping point ‘ solving this crisis could catapult the country economically and enhance global competitiveness. In the same vein, if left unabated, the swelling population of unemployed youth can erode most, if not all, of the gains of the past 20years.
It has been argued that South Africa’s post-Apartheid labour market perpetuates and reinforce youth unemployment leading to a range of risk patterns that litter the economic and labour landscape of the country. Much attention was given to these risk patterns including labour market failure, credit market failure, location-related failures, training systems failure, labour regulation failure, and the psyche and behavioral vulnerabilities that are likely to be exhibited by young people that are locked out of the labour force.
Borrowing from Development Finance, a pragmatic approach was adopted in the solutions proposed. The challenge of youth unemployment is not new and this therefore allowed for some of the notable interventions to be interrogated, albeit superficially. The end goal of the exercise of reviewing existing interventions was to propose alternatives or means of strengthening and bolstering the work that is already underway.
Continental and global examples were drawn to support proposals that are not yet adopted (fully) in South Africa, the purpose of which was to draw out the benefits that those regions and countries have derived from specific interventions.
What is certain is that being such a politically visible and contentious issue, the government would need to be bold enough to legislate into law policies that although have the potential to change the structure of the labour market, may at best be unpopular with business, unions, and other political parties. This approach requires leadership, which in South Africa is at the present moment a highly elusive quality.