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South Africa – Employment tax incentive to stem job losses following record drop

10 March 2014

The South African economy shed 118,397 jobs in February 2014, marking the biggest monthly loss in almost three years, according to Loane Sharp, Labour Economist for South Africa’s largest staffing firm, Adcorp.

During the month there were 104,593 permanent jobs lost and 26,832 temporary jobs lost, compared with January 2014. Significant job losses were reported in mining (down by -60.5% compared with last month), transport & logistics (-21.7%), as well wholesale and retail trade (-6.9%).

While current figures paint a discouraging picture, Mr Sharp remains optimistic about South Africa’s newly launched employment tax incentive and its ability to have a sustained, positive impact on the labour market.

“The defining characteristic of the employment tax incentive is that it is the first policy measure that seeks to stimulate demand for labour,” he explained.

The employment tax incentive is defined by its strategic focus; which:

  • Emphasises the creation of demand for jobs - To date, the government’s labour market policies have been both indirect (working in a roundabout way through the skills system) and broad (applying to a broad range of job-seekers). By contrast, the employment tax incentive applies to unemployed youth between the ages of 18 and 29.  
  • Side-steps forceful opposition from the Congress of South African Trade Unions (COSATU) - It is significant that the employment tax incentive was pushed through Parliament in record time, without what would appear to be the required dialogue between the social partners at the National Economic Development and Labour Council (NEDLAC). This is an important historical development: the South African government has not yet gone against COSATU on any serious economic policy proposal. Admittedly this is a tentative step, but it is nonetheless indicative that the government does not defer to COSATU on all matters of economic policy.  
  • Motivates profit - The government will provide a subsidy to employers (in the form of a credit against the employer’s overall Pay-As-You-Earn (PAYE) tax obligation) of up to ZAR 1,000 (USD 93) per month in the first year and ZAR 500 (USD 47) per month in the second year. The highest subsidy will be obtained by employing a worker under 30 years of age for two years at a monthly salary of ZAR 2,000 (USD 186).
  • Hypothesises linkages between employment and wage costs - Trade unions in South Africa have long argued that high wages do not discourage employment, and some have argued that high wages stimulate employment. If all goes well with the employment tax incentive, the direct effects of reducing wage costs on employment will become apparent.
  • Focuses on the formal sector - Only PAYE-registered employers will qualify for the employment tax incentive and this funding mechanism is therefore applicable only to formal business enterprises. Only employers who are registered for PAYE purposes will be able to avail themselves of the incentive. This measure might persuade small businesses operating in the ‘shadow’ economy – especially those whose average wages are between ZAR 2,000 (USD 186) and ZAR 8,000 (USD 745) per employee per month – to register with the authorities and regularise their tax affairs.

Mr Sharp continued: “For the above reasons, the employment tax incentive represents a great leap forward in the government’s thinking about South Africa’s unemployment problem. It is targeted at the right group, namely unemployed youth between the ages of 18 and 29. It is the first governmental initiative to directly stimulate the demand for labour. It has been introduced despite fierce opposition from COSATU. Its underlying mechanism is the profit motive. Inadvertently, it is a decisive test of the link between wages and employment. And perhaps by design, it is intended only for formal business enterprises.”

Although the incentive will initially be limited to low-skilled, low-paid youths, the government has indicated that the success of the programme will determine whether it will be extended beyond its current 31 December 2015 deadline.

“It is difficult to imagine a better designed programme for South Africa’s unique conditions. Based on our own modelling of the sensitivity of employment to wage costs, it seems likely that the youth tax incentive will create 852,000 jobs over the coming decade, assuming only that the incentive remains in place beyond its current anticipated deadline of 31 December 2015,” Mr Sharp concluded. 

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