Wage Subsidy and Labour Market Flexibility in South Africa

Abstract

We use a general equilibrium model to analyse the employment effects and fiscal cost of a wage subsidy in South Africa. We capture the structural characteristics of the labour market with several labour categories and substitution possibilities, linking the economy-wide results to a micro-simulation model with occupational choice probabilities to investigate the poverty and distributional consequences. The employment impact depends greatly on the elasticities of substitution of factors of production, being very minimal if unskilled and skilled labour are complements in production. The impact is improved by supporting policies, but the gains remain modest if the labour market is rigid.

Revisiting wage subsidies: How pro-poor is a South African wage subsidy likely to be?

“…Go et al (2010Go et al ( :1484 argue that the structural nature of unemployment in South Africa makes a wage subsidy an ideal policy option: structural unemployment, they state, cannot be reduced by 'macroeconomic management or temporary swings in aggregate demand', but requires policy interventions that directly stimulate labour demand. Thus, a formal sector wage subsidy, by raising the employment intensity of output, can enhance the rate of formal employment increase associated with output growth.…”

“…With respect to a South African wage subsidy programme, recent analyses point out the importance of increased flexibility around hiring and firing of subsidised workers (Levinsohn, 2008), and how capacity and skills constraints (Go et al, 2010) or imperfect competition (Pauw & Edwards, 2006) can hamper the effectiveness of the policy in raising low-skilled employment. Major challenges in South Africa include finding ways to promote participation by smaller firms, and how effectively to integrate learning and training into the wage subsidy scheme (this may be important to ensure long-term sustainability).…”

“…Earlier ex ante general equilibrium analyses of wage subsidies in South Africa have focused primarily on labour market outcomes and have highlighted various constraints to employment creation under such a policy (Pauw & Edwards, 2006;Go et al, 2010). Building on these earlier works, this study focuses on the poverty effects of wage subsidies under alternative assumptions about the extent of job creation and the distribution of these jobs across jobseekers from different household income groups or socio-economic backgrounds.…”

Prospective Analysis of a Wage Subsidy for Cape Town Youth

“…Our analysis of the effects of a wage subsidy complements those of Pauw and Edwards (2006), Burns et al (2010) and Go et al (2010), who consider wage subsidies in the context of computable general equilibrium (CGE) models of the South African economy and find positive effects on employment, wages and GDP.…”

“…Using the same KMP data, Schoer and Leibbrandt (2006) find that several different search strategies prevail in the data. An employer-based wage subsidy for youth in South Africa is discussed in Pauw and Edwards (2006), Levinsohn (2008), Go, Kearney, Korman, Robinson and Thierfelder (2010), and Burns, Edwards and Pauw (2010).…”