YOUTH UNEMPLOYMENT IN THE SOUTH AFRICAN CONTEXT: THE CAUSES, EFFECTS AND POLICY OPTIONS Youth (15-24 years)

unemployment is not only a South African problem, but a global phenomenon. In most countries, youth unemployment is much higher than that of adults (OHiggins, 2001). According to a study run by the International Labour Organization(ILO), the youth makes up nearly half of the worlds unemployed (Lam et al, 2007). With the current global economic situation, unemployment has worsened, with the youth being disproportionately represented in some types of temporary jobs, which turn out to be a deadend rather than a stepping stone to better prospects (ILO, 2012). South Africa has had a problem with youth unemployment for the past forty years and because of that, makes a very important case study (Lam, Leibbrandt and Mlatsheni, 2008). B. Clarke and H. Summers, the authors of The Dynamics Of Youth Unemployment, state that youth unemployment can be explained by two different ways, that is, the problem of job availability or lack of and secondly, employment instability. This paper will look at Unemployment in South Africa, the causes, effects and policy options that are available. Unemployment is not only an economic challenge but also social as it leads to cases of crime, drug use, violence in schools which mostly affect a concentrated group, namely young black youth (Freeman et al, 1982). As a result, South Africas National Planning Commission (NPC) recognises the fact that education, training and innovation have a critical role to play when it comes to economic growth and the countrys long term development objectives. The NPC thus released a draft of the National Development Plan (NDP) which engages with a number of issues that have been raised when it comes to the education system in South Africa which is crucial in the development of the skills of the South African youth (Nyoka, 2011). This paper thus concludes that aggregate demand and lack of skills are the main factors that contribute towards youth unemployment. As a result, active market labour policies are regarded as crucial and urgently needed in South Africa. Causes of Unemployment An examination of the causes of youth unemployment boils down to aggregate demand, lack of skills and the size of the youth labour force (OHiggins, 2001). The decline in aggregate demand, associated with the recent recession, has negatively impacted employment of both the old and the young. However the youth have been affected disproportionally as their employment prospects are more sensitive compared to that of adults. From the employers

side of view it is simply cheaper to fire young workers than older people. This is because younger people have fewer skills and thus represent lower levels of investments by firms due to training, and thus involve a smaller loss to firms, making them easily dispensable (OHiggins, 2001). Furthermore, since younger people change jobs more frequently, they are less likely to be part of employment protective legislation or trade unions therefore making them cheaper to dismiss (OHiggins, 2001). Another factor contributing towards the high youth unemployment rate is the size of the youth population. As the number of the unemployed youth increases, more jobs are needed to accommodate them (OHiggins, 2001). In South Africa it is not only a case of the size but the distribution of the unemployed that is of concern. It is the youth from under privileged backgrounds that is mostly unemployed in South Africa with the Africans making up most of the group (Lam et al, 2007). Most of the work seekers do not find jobs because they are not highly educated due to reasons such as poverty and their inability to cope with studies (Yu, 2000). How can South Africa address youth unemployment? The magnitude of the challenge of youth unemployment in South Africa means that a combination of policies will be needed to resolve it (National Treasury, 2011). This paper will briefly look at some policy interventions that the government can implement in partnership with firms, to try to decrease the level of youth unemployment in South Africa. When looking at policies, it is important to match the solutions with the problem. South Africa has a large problem when it comes to skills shortages and the level and quality of education. The policies that the government can look into, to alleviate the problem of skills shortage include entrepreneurship schemes and training programmes. Literature suggests that well targeted programmes that have considerable training content have the potential to improve the employment outcomes of those targeted (Kluve and Schmidt, 2002). Entrepreneurship schemes promote skills that help to create and manage sustainable and efficient businesses that are capable of providing jobs that are permanent as well as employment growth, often providing loans and micro credit (National Treasury, 2011). Youth training programmes reduce the skills shortage in the country and include on-the-job training, employment programmes and apprenticeships (Martin and Grubb, 2001). It is important to note that the training programmes will improve the employment prospects of the youth rather than improve the hourly earnings (Martin et al, 2001). There are many training programmes

already in place in South Africa, with the National Skills Development Strategy guiding the skills development. More can be done in that respect though, with more corporate funding of learnerships and internships than the country has currently. One idea that has been looked into by the Department of Economic Development that is linked to direct public employment is that of National Youth Service. This programme would provide an opportunity for young people who struggle to find work after they have left school to participate in a period of public service. In the process, skills, experience and an allowance would be gained (National Treasury, 2011). South Africa also needs to implement programmes that improve job-searching efficiency and reduce the mismatch in the labour market. The main goal of such programmes is to improve job entry rates as well as hours worked. Job-search programmes have been implemented in countries such as the US and Sweden with positive results, but also the observation that wages do not increase as expected (Robinson, 2000). However, the job-search programmes do achieve their objective of assisting the unemployed obtain work. The fact that other objectives such as significant wage increase are not achieved simply shows that the programmes have to be implemented in conjunction with other policies. The government should expect the active labour market programmes mentioned to be exposed to decreasing marginal returns. This is because, as the programmes are extended to larger groups, the ability to improve the relative competitiveness of the individual groups decreases and dead weight loss increases (Calmfors, 1994). It is important to note that the success of these policies depend largely on the economic cycle (Kvist and ploug, 2003). Policies that target youth employment on the firms side also need to be taken into consideration. This paper will look at employment subsidies. Employment subsidies are incentives that are used to accelerate job creation and raise general employment. Employment subsidies can be used to reduce the cost of labour by being provided to employers (Kluve et al, 2002). Since the cost of labour has decreased, the level of labour demand increases. Employment subsidies can also act as incentives to work for the youth as the subsidy increases the returns to employment. The subsidy can be in a number of forms namely; direct transfers, income tax credit payments or a reduction in tax payments (National Treasury, 2011). The high rate of unemployment in South Africa suggests that there is low or insufficient demand for young workers. This then means that the labour market cannot absorb all the incoming jobseekers. As a result of such features of the labour market, an incentive

scheme such as that of the employment subsidy has a potential of creating jobs as it encourages firms to higher young workers. To explain how youth unemployment subsidies cause an increase in employment, the graphs below, named panel A and panel B will be used. The youth unemployment subsidies decrease the cost of labour, incentivising firms to use more youth labour since it is cheaper. At the individual firm level, the labour demand curve shifts downwards due to the decreased cost. When all the individual firms are observed together, a right shift of the aggregate labour demand curve (Ld) is seen. The initial Labour demand curve, Ld (W) shifts rightwards to Ld(W[1-s]) as a result of the subsidy. There is an additional multiplier effect as declining labour costs can lead to lower product prices and therefore higher demand (Katz, 1998). As seen on Panel A, both labour demanded and wages increase. The effect on wages and labour though depend on the sensitivity of labour demand and labour supply on wage changes (National Treasury, 2011). Panel A exhibits a general case with an upward sloping supply curve where the subsidy is shared between the employee and the firm. Panel B depicts the extreme case where there is a high level of unemployment. As a result, the wage level is fixed and the labour supply curve is horizontal (infinitely elastic). In this case, the subsidy has no effect on ages but a substantial effect on employment as increase in labour demand is not limited by rising wages (National Treasury, 2011).

WAGES

Figure 1, taken from the National Treasury 2011

When designing employment subsidies, it is important to note that there are indirect consequences that can be observed that limit the increase in youth employment. These effects and consequences include stigma, substitution and displacement effects and deadweight loss (National Treasury, 2011). Deadweight loss from the subsidy occurs when a subsidy is paid to unemployed people that would have been hired regardless of the subsidy. Displacement effects occur when firms with subsidised labour increases its output, and displaces output with no subsidised labour thereby potentially crowding out employment somewhere else. Substitution effects occur when there are targeted subsidies. Firms may replace existing unsubsidised workers, who are not part of the target group, with subsidised workers. Subsidies may provide stigma effects if they are specific to certain socio-demographic groups. This may lead to employers having a negative attitude and perception of the target group, limiting the impact of the subsidy (National Treasury, 2011). Thus an employment subsidy should aim to minimise these negative effects, in order to maximise employment. Despite the fact that the youth employment subsidy proposes an increase in youth employment, the negative consequences are too significant to ignore. The substitution effect would be widely spread, affecting mostly the skilled and semi-skilled workers which are still likely to be young workers. Furthermore, there is no guarantee that firms will carry out formal training and skills development. Most importantly, the youth employment subsidy does not address the causes of unemployment but rather the symptoms (COSATU, 2012). It therefore makes more economic sense to use active market labour policies (training, jobsearch and entrepreneurship schemes) rather than policies that target labour demand. Conclusion The youth unemployment challenge facing South Africa is significant with over half of the youth being unemployed. A short term and long term strategy, with reformed policies, needs to be implemented. As young workers have little to no experience, their chances of becoming employed are very limited. This is an economic problem and restricts South Africas ability to grow economically. Furthermore, unemployment contributes largely towards crime, poverty and violence. A policy response to this problem is therefore imperative and urgent as social problems that result from unemployment continue to increase.

There are a number of options that the country can use to try to alleviate this problem. This paper has focused on active labour market policies and the youth wage employment subsidy. Furthermore, this paper has found that active labour market policies are likely to be more effective compared to the youth employment subsidy which tackles the demand of labour. It is also important for the government to realise that the policy programmes cannot work independently but rather support and complement each other.