Youth Unemployment in South Africa: Reasons, Costs and Solutions

Introduction – A description of the question: “What are the causes of youth unemployment? ” A high employment rate among the people of a nation promotes a spirit of dignity, independence, achievement and innovation – it isn’t only about earning a form of income. In stark contrast, unemployment in South Africa is accompanied by social troubles such as violence, poverty, a loss of morale, crime, social degradation and political disengagement.

Furthermore, the reason why youth unemployment is such a large concern is that a high youth unemployment rate shows that the youth waiting to be employed aren’t gaining the necessary skills or experience needed to further advance the economy, which then prevents the country’s economic development and forces a greater liability on the government to provide social support. The three main reasons for the youth in South Africa being unemployed can be summarized as follows: (Kearney, 2009)

1. Firstly, businesses perceive young, inexperienced jobseekers as a risky investment and would rather opt for existing skills and experience.

2. Secondly, schooling is not a substitute for skills, and that’s why education can’t be regarded as a consistent indicator of an individual’s capabilities. Furthermore, poor schooling quality in South Africa feeds into mediocre workplace learning capability.

3. Lastly, given the uncertainty about the occupational potential of young people just graduating from high school, employers consider entry-level wages to be too high in relation to the risk of appointing inexperienced personnel. It can be seen that young people are particularly disadvantaged in the South African labour market. Another contributor to the already precarious situation though, came in the form of the global recession in 2008.

Employment of people between the ages of 18 and 24 fell by more than 20% in the two years following the recession compared to an overall decline of a mere 6. 4%; further driving home the fact that employers are holding on to experienced workers and not risking the appointment of young new staff. (National Treasury, 2011) “What are the causes of youth unemployment in South Africa? ” “What should government do to improve the levels of youth employment? ” – Why are these questions relevant in South Africa? Unemployment is nothing new; or the psychological, economic or social consequences of it. The concern of unemployment has been with us for a very long time.

One of the most important issues in the balance, from an economic perspective, is the loss of income to the dependents of the unemployed young people and the loss of output to the economy; and together with that is the duration of the period one is unemployed. Hence, the socio-economical cost of unemployed youth to South Africa could be viewed as a two-fold problem: The first of which could be seen through South Africa’s high unemployment rate reflecting the dynamic aspects of its unemployment.

Young people that are jobless today aren’t acquiring the necessary skills and experience needed to be employed and productive later in their lives. Through this we can see how the static costs of unemployment would accumulate over time. Additionally, consequences of these static costs can be seen through the youth unemployment issue getting progressively more costly in terms of lost future growth by simply waiting to confront it.

Therefore, this issue is not of such a nature that it would correct itself. Without intervention from government through fiscal or macroeconomic policy changes, the problem would only worsen. (Wijnberg, 2013) The second leg of the problem is one that is slightly more difficult to measure, but equally important as the first; as youth unemployment contributes to the degradation of ethical values and moral decline that is parted with the social problems that go hand-in-hand with a loss of hope.

This loss of hope experienced by almost half of the youth in South Africa is characterized by young people being discouraged from trying to get jobs in the traditional manner and then has the effect of them turning to the streets or to crime for their provision; as that goes along with the feeling that one has nothing left to lose and little for which to hope. (Levinsohn, 2007) The practical, comprehensive relevance of the question at hand can be seen through the above-mentioned consequences of the high unemployment rate of young people in our nation.

The answer to this question is equally relevant and will be thoroughly discussed in the following section of this paper. What does government need to do to improve the levels of youth employment? – A call for a change in labour market policy. As discussed earlier, government needs to step in to solve this problem. A classical economist’s approach of waiting for the issue to rectify itself would not do the trick. The economy needs help, and a very effective method would be for the government to implement a change in labour market policy in the form of a youth employment subsidy.

In itself, a youth employment subsidy will not solve youth unemployment in South Africa. To create additional jobs, the economy desperately needs to realize more swift, sustained, and inclusive growth. The youth employment subsidy can, however be used as a tool to assist young, inexperienced employees to gain access to appropriate occupations in the formal sector and develop their chances of permanent employment later in their lives. But while one is young it’s all about getting that first job.

Being unemployed and having some work experience will increase one’s chances of being employed again by more than three times. (National Treasury, 2011) The youth employment subsidy would aim to help young people achieve exactly that; and it will do so by decreasing the relative cost of employing less-skilled, young workers. Additionally, it aims to shrink the gap between entry-level real wages and productivity for young people. Thus, it lowers an employer’s risk that is accompanied with hiring new recruits and simultaneously stimulates job creation.

Relating to the above-mentioned reduction of an employer’s risk is a very important aspect to this employment subsidy that needs mentioning; it is the fact that a probationary period be included at the start of any young person’s employment through the subsidy. During this probationary period should be included the right of an employer to let go of any employee on a “no questions asked basis”. A policy change of this magnitude cannot be implemented without affecting the rest of the economy in some way.

There are a number of advantages that an employment subsidy brings to the forefront relating to the correction of certain market imperfections and on the other hand there are several indirect results and inadvertent consequences that can limit net employment gains in the short run. Both the pros and the cons will now be discussed in detail: Pros of a youth employment subsidy: (Also, how it will combat certain market imperfections) The first market imperfection to look at points to the high costs of dismissing an employee.

Hiring someone that hasn’t proven his/her productivity and quality standards is a risky undertaking for employers, especially if dismissal is a burdensome, costly process. A youth employment subsidy will combat this market imperfection by allowing employers to dismiss non-performing workers at will. Employers will now be able to offer a wage consistent with what the expectation of productivity levels will be at the beginning of the probationary period and gradually let go of workers that are performing below par while retaining and adjusting upwards the wage of those that are acceptable.

In this way overall productivity in the private sector of the economy would be given a great boost. The second market imperfection occurs due to the externalities associated with having unemployment in the 50% range for matriculates or school-leavers. These market externalities exist at a societal level and include an increase in crime that is associated with the loss of hope. As these are costs to society, they aren’t costs to individual entities and hence the resulting externalities.

A youth employment subsidy would combat these externalities by increasing participation of young school-leavers by encouraging more active job-search in the formal sector and thus creating a more inclusive economic environment for the youth in South Africa. A third market imperfection is caused by high minimum wages and the indirect effect of these high minimum wages on wages that aren’t held up by a price floor.

If wages are above the level that would clear the market, there is a surplus of workers willing to work at that wage; once the supply of labour exceeds the demand thereof, organizations can be very particular in which potential workers they want to hire. With this in mind, organizations would only hire the best workers who have the most experience if the organization is going to spend such a high minimum wage on them. Thereby eliminating the chances of young, inexperienced workers from being considered for jobs.

A youth employment subsidy would combat this market imperfection by alleviating the net unemployment created by raising minimum wages as it allows an employer to pay the same amount in total wages he would have paid, but in turn employ more people. (Levinsohn, 2007) Cons of a youth employment subsidy: A substitution effect: This effect could occur in the case of a youth employment subsidy if businesses are tempted to substitute unsubsidized employees (who do not belong to the targeted youth group) for young, subsidized employees.

This seems unlikely in South Africa though, with it being very difficult to let go of permanent employees. But there will always be the possibility. A displacement effect: This effect takes place when a business with subsidized employees increases output, and displaces output among businesses that don’t have subsidized employees. Resulting in the effect that the subsidy could potentially crowd out employment somewhere else.

A stigma effect: This effect takes place when a subsidy is only provided to a specific group, as in the case of the youth subsidy. Some employers might have a negative view of the targeted group, if targeting is grounded on socio-demographic characteristics, preventing interest in the subsidy policy and limiting the effect thereof. Deadweight loss: Would take place when the youth employment subsidy is paid to unemployed workers that would have been hired without the subsidy. (Levinsohn, 2007)

Conclusion: Having achieved all that South Africa has accomplished to date hasn’t come easy; it was only through a lot of struggling and sacrifice. Unfortunately, unemployment threatens the breakthrough progress that has been made and its burden is generally carried by those who were previously disadvantaged. The youth employment subsidy might be slightly ambitious, but it offers very solid steps toward dissolving the threat that comes with postponing a policy response to youth unemployment.

The depreciation of human resources is a deteriorating effect that South Africa won’t be able to bear for a very long time. Government should see this as an overwhelming reason to target matriculates and young graduates before their studies are forgotten or becomes obsolete. A youth unemployment subsidy comes with a relatively high price tag, but it pales in comparison to the growing costs of being indifferent when action is clearly needed. (Levinsohn, 2007)