Young people join in Youth Day celebrations in New Castle, Madadeni, KwaZulu-Natal, on Sunday.  Picture: GCIS
Young people join in Youth Day celebrations in New Castle, Madadeni, KwaZulu-Natal, in June 2013. Picture: GCIS

THERE has been intense debate recently about both the efficacy and efficiency of SA’s youth employment tax incentive. This followed a statement by the Treasury revealing that, in the first year since its introduction, 29,000 employers have claimed tax relief under the incentive, corresponding to 270,000 new youth hires.

But this does not necessarily mean that 270,000 new jobs were created.

In a report I co-authored with Arden Finn, we found that in the first six months after its introduction, there was no evidence that the incentive had had any statistically significant and positive effect on youth employment probabilities.

How does one reconcile these two statements? We examined data from the first two waves of last year’s Quarterly Labour Force Survey, which covers the first half of the year. The Treasury’s most recent statement covers the whole of last year. It is possible that the second half of last year saw a substantial effect on youth employment probabilities, which would not be reflected in our results.

But this is unlikely to adequately explain the discrepancy. A more plausible way to reconcile the two conflicting statements is to understand that we are talking about different outcomes. The statistics from the Treasury reflect actual claims and come from the South African Revenue Service, while our analysis is focused on respondents in the labour force survey. It is possible that there was a large number of claims, but simultaneously few new jobs were created that can be directly attributed to the incentive.

To see why this is so, we need to understand first how a firm becomes eligible for the incentive. Any firm that is registered for pay-as-you-earn tax (PAYE) can set off its PAYE obligations against the wages earned by a new youth employee who is between the ages of 18 and 29 and earns R6,000 a month or less. Thus, the term "employees", as used by the Treasury, refers to new eligible employees in eligible firms that have exercised their right to such tax relief under the incentive. It does not necessarily mean that 270,000 new positions were created.

In contrast, our study aims to establish the likelihood that a youth aged 18-29 is employed, and specifically tries to estimate how different this probability would be if the incentive had not been implemented. We needed to take into account the fact that the economy is growing, even if growth is slow. We thus compare the employment probabilities of youth with those of older workers, who would not generate any tax relief for firms, but who would also experience any improvement in overall labour market conditions due to general economic growth. Our findings indicate that, in the short run, the youth fared no better and no worse than we would have expected had the incentive not been implemented, and we make this claim by benchmarking their employment outcomes relative to older workers’ employment outcomes.

To clarify this, it helps to consider three groups of new and eligible youth employees. There are new employees in existing positions (or turnover), new employees in new positions that would have been created even in the absence of the incentive (or natural job creation), and new employees in new positions that have been created only because of the introduction of the incentive. While all three groups are eligible for tax relief, and could thus be claimants in the Treasury’s number, only the third group will change the overall chances of youth finding employment.

The Treasury spokesman was quite correct in that he said "employers have claimed the incentive for at least 270,000 employees". He does not claim the incentive created 270,000 new jobs, although this has been misinterpreted in several articles in the media. Nonetheless, it is important to be aware of the differences between the statements. This is because the tax relief for turnover and natural job creation represents financial transfers to firms, but will have no effect on the national youth unemployment rate.

Given the scale of the national youth unemployment crisis and the costs of the incentive, it seems that both the efficacy and efficiency of this employment tax incentive programme warrant being closely monitored and periodically reviewed. At the same time, six months is not a long period in which to adequately evaluate such a policy. It would be premature to call for either the scrapping or the expansion of the incentive based on our present evidence.

Ranchhod is a chief research officer in the Southern Africa Labour and Development Research Unit at the University of Cape Town.