CONFRONTING YOUTH UNEMPLOYMENT IN SOUTH AFRICA

National Budget Speech Competition entry no: 1877

Author: Nidhish Balaga

This paper investigates the causes of youth unemployment in South Africa and suggests policies as possible approaches to improve employment among the youth.

Confronting Youth Unemployment in South Africa The youth of South Africa is described as individuals in its population that are aged between 15 years to 24 years. According to the discussion paper by the National Treasury, about 42% of the youth in South Africa are unemployed (National Treasury, 2011: 5). Further analysis of the employment ratio of South Africa reveals that it ranks far below other emerging markets such as Brazil, Russia, India and China (Blumenfeld, 2012). This is a cause for concern as it provides an indication of the future economic growth of the country as well as its standard of living. This paper investigates the causes of youth unemployment in South Africa and suggests policies as possible approaches to improve employment among the youth. The National Planning Commission was established by the government of South Africa in May 2009 with the responsibility of strategic planning for the country (National Planning commission, n.d.). In November 2011, the commission formed its first draft of the National Development Plan which incorporates a strategic plan for its vision for 2030 (National Planning commission, n.d.). In the run up to the formulation of the National Development Plan Framework, a diagnostic was conducted where-in some of the current challenges were identified, which have been widely accepted One of the causes for youth unemployment in South Africa is that too few people work (National Planning Commission, n.d.). This implies that the proportion of tax payers in the economy is significantly low and hence, the number of people that have buying power in the economy is low. The result in an undersized economy where the demand for goods and services become limited which translates into a limited supply. This has a dampening effect on Job creation. South Africas labour absorption is 40.8% which is lower than India at 55% and Brazil at 65% (Blumenfeld, 2012). This provides further evidence of how the South African economy is limited in comparison to other emerging markets in terms of the proportion of people employed over the working-age population. The lack of skills within the workforce is a major contributor toward youth unemployment (Blumenfeld, 2012). Employers regard unskilled, inexperienced jobseekers as a risky investment (National Treasury, 2011). Given the political turbulence of South Africas history, we are able to gain some understanding of the gap in the level of skills required and the level of skills obtained among the youth (Lam, Leibbrandt and Mlatsheni, 2008). Large section of the population became unskilled and it resulted in difficulty for this group to be

part of the mainstream economy after the democracy of South Africa in 1994. This has had some legacy effect on the youth of the contemporary South Africa. Certain obligations such as having to contribute toward family income to support siblings are some of the other reasons why the youth facing poverty leave their education incomplete (Lam, Leibbrandt and Mlatsheni, 2008). The following table in a report by SALDRU shows us the distribution of education levels among the youth (Lam, Leibbrandt and Mlatsheni, 2008).

The column of interest in this table is the statistics displayed for all the youth across South Africa. There is cause for concern when we notice that only 2% of South Africas youth had completed higher education with the majority of the youth not having completed grade 12. Infrastructure being poorly located, inadequate and under-maintained is another factor that affects employment (National Planning Commission, n.d.: 18). Infrastructure is a key platform which enables entrepreneurship and job creation. The infrastructure development in South Africa has been unevenly distributed with large areas that still suffer from inadequate road networks, bulk services and broadband connectivity. (National Planning Commission, n.d.). Furthermore, the result of spatial divides within the country hinders growth with urban centres being far apart (National Planning Commission, n.d.). This lumpiness in infrastructure density restricts entrepreneurship and limits job creation and is another causative factor for youth unemployment. South Africa is also challenged by the fact that its economy is unsustainably resource intensive (National Planning Commission, n.d.). This implies, we are at the low end of the value chain and the model is unsustainable. A case in point is India touted as a software powerhouse. In reality, India is at the lower end of the value chain where its software savvy

engineers create software products and services for Microsoft, Apple, Facebook and many others (who employ large number of Indians and Indian companies) whose offerings are inturn consumed by the Indian population at a significantly higher premium. The advanced economies benefit at the expense of the emerging economy simply at the cost of putting a pay-cheque in their pockets. India has yet to produce a Bill Gates, a Steven Jobs or a Mark Zuckerburg. Similarly, South Africa Mines away valuable minerals, only for its population to buy back the same in the form of finished products at a significantly higher premium. A large section of the economy is involved in adding value to a product in its raw material stage, which is then bought back in the form of cars, tools and appliances. The reason that this

becomes unsustainable is that it not only places a great deal of pressure on the natural resources of the country, it also implies that South Africa buys the final product from economies that are largely secondary or tertiary based in terms of the product development stage. This is a vicious cycle and the government needs to facilitate the transformation of the value chain so that whilst we have a Mark Shuttleworth in the software industry, South Africa should be able to create many more such entrepreneurs in the Industrial sector too. In order to improve the levels of youth employment, the government must introduce a policy that fills the various shortcomings in the current economy. There have been various policies that have been suggested by economists, however, the policy that I would suggest is one that uses a mixture of strategies and focusses on long term sustainable development. These include improvement in skills among the youth through improved education/vocational training, as well as, adopting policies that foster a better investment climate and business development (Blumenfeld, 2012). I choose to term the former as push factors in the economic plan and the latter as the pull factors. Push factors affect at an individual level while the pull factors facilitate a level playing field that allows for collective motivation and enterprise there-of. Considering that we are challenged by an undersized economy in the global context, we need to identify how we can position South Africa at the cross-road junctions of World markets. Most advanced economies and some emerging markets have their niche sectors that have helped them to reach where they are currently. UK for example is the capital of financial markets, The United States is the largest consumer economy, and India has positioned itself as the back-office of the worlds software development activity whilst China has done the same with regards to outsourced manufacturing. South Africas niche is the mining sector, but that is a traditional model and is unsustainable as I discussed earlier. We need to identify

a role for ourselves in the new world order and for that we must analyse our collective strengths and weaknesses. From a high level perspective, our strengths that we enjoy are a fairly first world infrastructure at our urban centres with our banking, roads, bulk services and broadband. South Africa can also boast of a fairly first world corporate culture and the fact that we are largely English speaking unlike China or Vietnam. At the same time we are hindered by our weaknesses like high cost of labour and the currency exchange rate, over and above the challenges that I have discussed earlier. In the light of these strengths and weaknesses, South Africa will have to draft a plan that is a combination of the push and pull factors to boost the economy that will in turn generate higher employment rates. Push factors like job subsidies, vocational skills training, basic and adult education etc. Pull factors like Tax incentives for budding entrepreneurs, Special Economic zones, reduction in the basic costs of doing business like communications and power tariffs and facilitate infrastructure that will enhance the Innovation life cycle by shortening the time between idea creation and product/service delivery. South Africa will have to focus on innovation and entrepreneurship. Firstly, in the long run, the skills of the young labour force have to be improved. The suggestion made by scenario planner, Clem Sunter, is that more technical skills training centres need to established such as, apprentice training colleges, nurses training colleges or teachers training colleges (ABN Digital, 2012). This gives the opportunity for the youth that do not complete their education in the standard route to obtain practical skills so as to be competent within the labour force. The potential problem with this is that there could be a general apathy created among the youth where they have a form of safety net to not completing their education. However, this can easily be dealt with by fostering a learning based programme within schools to assist learners that do not cope academically and to encourage them to achieve well. In the current economic environment where the youth of the country have a low level of skills and experience, firms are reluctant to hire young individuals especially when the costs of hiring and letting go of new staff can be high (National Treasury, 2011: 6). In order to encourage firms to hire more individuals from the youth of the population, certain incentives need to be created. One such incentive is the youth employment subsidy. The idea of a youth employment subsidy is that firms hiring a number of young individuals into their workplace

are compensated through tax benefits (eg. 50% of wage cost for the first year) (Paton and Marrian, 2013). This approach was implemented in Singapore and resulted with huge success, halving their unemployment in the duration from 2003 to 2007 (DA youth, 2012). The subsidy reduces the financial costs and risks associated with hiring an inexperienced individual (National Treasury, 2011: 7). It also helps fairly small sized firms in being able to afford the training of young workers (National Treasury, 2011: 7). Furthermore, the subsidy could encourage more activity in terms of job-seeking among the youth as more individuals would gain confidence in being able to get jobs. However, labour unions, such as COSATU, argue that companies will use the subsidy to obtain cheap labour. Hence convincing labour unions that the subsidy may push companies to create more jobs for the

unskilled/inexperienced; may take time. Another issue of concern with the subsidy is that it is not sustainable in the long term being used on its own. Firms may be able to cut some costs in the short run but this will not be a major incentive to hire younger, inexperienced/unskilled employees and jeopardise their quality of production/services rendered. Furthermore, a firm will not hire more workers if there is no need created for it. Hence, the youth employment subsidy alone is not sufficient and requires other factors such as nurturing greater skill levels among the youth as well as an economic environment that fosters entrepreneurship and expansion is addressed as well.

South Africa must also create strength and viability in the market place to sustain long term growth and alleviate youth unemployment. In order to attain this, South Africa needs to establish more special economic zones in the country where entrepreneurial flair can be fostered and new industries can be opened. The objectives of such zones should be to Reduce the cost of doing business. It must also introduce programmes that foster innovation. The Allan Gray Orbis foundation has a fellowship programme that identifies high impact leaders and not only covers their cost of tertiary education but also cultivates an entrepreneurial mind-set, exposing its candidate fellows to various entrepreneurial leaders, quarterly discussion sessions on current African economic issues and monthly exercises to cultivate opportunity-seeking mind-sets (Allan Gray Orbis Foundation, n.d.). Similar programmes need to be created by the government in order to mentor and encourage budding entrepreneurs among the youth.

Creating such an economic environment ensures that the economy isnt undersized and long term growth is nurtured. Existing firms are encouraged to expand/develop businesses within South Africa and this makes South Africa a favourable destination to conduct business with other global entities. However, this process increases research/acquisition costs to identify areas for creating special economic zones and certain market rigidities such as high cost of labour and high exchange rates make the process of creating such an environment rather long term. Youth unemployment is a major socioeconomic issue that confronts South Africa and is of significant concern to its government. In order to resolve this issue, South Africa needs to develop a stronger labour demand. It is thus vital to introduce a policy response that addresses the various causes of youth unemployment and is sustainable in the long term. This can be accomplished by encouraging job creation through incentives such as the youth employment subsidy and creating an economic environment that induces expansion and growth. Furthermore, the quality of labour among the youth is poor and can be improved through various improvements in education and job training/skills development centres. Hence, the suggestion made in this paper to alleviate youth unemployment is to use all three approaches to induce a stronger labour demand and a sustainable economic growth so that in the long term South Africa can be in the forefront of other emerging markets.

References:
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6.) Lam, D., Leibbrandt, M. and Mlatsheni, C. (2008) Education and Youth Unemployment in South Africa, [Online], Available: http://www.saldru.uct.ac.za/home/index.php?/component/option,com_docman/Itemid,32/limitsta rt,70/ [27 March 2013]. 7.) Manpower Group (2012), [Online], Available: https://candidate.manpower.com/wps/wcm/connect/GRMPNet/434febcd-6fac-4e96-bbeea93dfa129f58/How+Policymakers+Can+Boost+Youth+Employment.pdf?MOD=AJPERES [27 March 2013]. 8.) National Planning Commission Executive summary of NDP, [Online], Available: http://www.npconline.co.za/MediaLib/Downloads/Downloads/Executive%20SummaryNDP%202030%20-%20Our%20future%20-%20make%20it%20work.pdf [27 March 2013]. 9.) National Planning commission National Planning Commission, [Online], Available: http://www.npconline.co.za/ [27 March 2013]. 10.) National Treasury (2011) African Economic outlook, February, [Online], Available: http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/PDF/Confronting%20youth%20une mployment%20-%20Policy%20options.pdf [25 March 2013]. 11.) Paton, C. and Marrian, N. (2013) Business Day, 28 February, [Online], Available: http://www.bdlive.co.za/national/2013/02/28/youth-wage-subsidy-with-incentives-gets-green-light [31 March 2013].