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Introduction Youth unemployment is not only a South African problem, but a global phenomenon.

In most countries, youth unemployment is much higher than that of adults (OHiggins, 2001). According to a study run by the International Labour Organization(ILO), the youth makes up nearly half of the worlds unemployed (Lam et al, 2007). With the current global economic situation, the unemployment situation has worsened, with the youth being disproportionately represented in some types of temporary jobs, which turn out to be a dead-end rather than a stepping stone to better prospects (ILO, 2012). South Africa has had a problem with youth unemployment for the past forty years and because of that, makes a very important case study (Lam et al, 2008). B. Clarke and H. Summers, the authors of The Dynamics Of Youth Unemployment state that youth unemployment can be explained by two different ways, that is, the problem of job availability or lack of and secondly, the employment instability. The two causes will be looked at in detail later on in the paper. This paper will also look as why unemployment is more important than others, the role of the government and the private sector as well as to look at all possible solutions to the employment phenomenon in South Africa. Defining unemployment and the youth It is important that this paper define what is meant by unemployment and the youth before the issue of youth unemployment is tackled. According to the International Labour Organization (ILO), the unemployed are defined as those people who have not worked for more than one hour during the short reference period (generally the previous week or day) but who are available for and actively seeking work (OHiggins, 2001). An alternative broad definition of unemployment dismisses the need to actively seek for work (Nattrass, 2002). This alternative definition includes discouraged workers which were not included in the strict definition as they do not actively seek employment. The youth is defined in this paper as the age group between 15 and 24. Causes of Unemployment An examination of the causes of youth unemployment boils down to mainly three factors, namely, aggregate demand, youth wages and the size of the youth labour force (OHiggins, 2001). Aggregate demand affects the youth in the same way that it affects anyone else. This means that a fall in aggregate demand of labour causes an increase in the level of unemployment. What is of more importance is why the youth is affected so disproportionally compared to the adults. There are a number of reasons why the youth unemployment is more sensitive to aggregate demand. From the employers side of view it is simply cheaper to fire young workers than older people. This is because younger people have fewer skills and thus represent lower levels of investments by firms due to training and thus involve a smaller loss to firms making them easily dispensable (OHiggins, 2001). Furthermore, since younger people change jobs more frequently, they are less likely to be part of employment protective legislation or trade unions therefore making them cheaper to dismiss (OHiggins, 2001). Another factor contributing towards the high youth unemployment rate is the size of the youth population. As the number of the unemployed youth increases, more jobs are needed to accommodate them (OHiggins, 2001). In South Africa it is not only a case of the size but the

distribution of the unemployed that is of concern. It is the youth from under privileged backgrounds that is mostly unemployed in South Africa with the Africans making up most of the group (Lam et al, 2007). Most of the work seekers do not find jobs because they are not highly educated due to reasons such as poverty and their inability to cope with studies (Yu, 2000). Most discussions on Youth unemployment focus on the fear that lack of jobs during ones youth will considerably contribute towards unemployment later on in life (Freeman, Wise, 1982). Freeman and Wise, the authors of the volume titled The Youth Labour Market Problem: Its Nature, Causes, and Consequences, established that unemployment during ones youth has no lasting effect on overall employment in the long run but mostly a later negative effect on wage rates. The problem with youth unemployment though, is that it leads to cases of crime, drug use, violence in schools and other non economic issues which mostly affect a concentrated group, namely young black youth (Freeman et al, 1982). How do we address youth unemployment? The magnitude of the challenge of youth unemployment in South Africa means that a combination of policies will be needed to resolve it (National Treasury, 2011). This paper will briefly look at some policy interventions but will mostly focus on the youth unemployment subsidy. There are various policies and interventions such as training programmes, labour market policies, entrepreneurship schemes and direct public sector employment creation that South Africa can implement together with the unemployment subsidy (National Treasury, 2011). Training programmes in any economy are intended to reduce the skills shortage. There are many training programmes already in place in South Africa with the National Skills Development Strategy guiding the skills development. More can be done in that respect though with more corporate funding learnerships and internships than currently. Public work programmes are usually run by government and are aimed towards disadvantaged South Africans and mainly providing short term employment and training for the unemployed (National Treasury, 2011). One idea that has been looked into by the Department of Economic Development that links direct public employment is that of National Youth Service. This programme would provide an opportunity for young people who struggle to find work after they have left school to participate in a period of public service. In the process, skills, experience and an allowance would be gained (National Treasury, 2011). Entrepreneurship schemes promote skills that help to create and manage sustainable and efficient businesses that are capable of providing jobs that are permanent as well as employment growth, often providing loans and micro credit. Employment subsidies are incentives that are used to accelerate job creation and raise general employment. Employment subsidies can be used to reduce the cost of labour by being provided to employers (National Treasury, 2011). Since the cost of labour has decreased, the level of labour demand increases. Employment subsidies can also act as incentives to work for the youth as the subsidy increases the returns to employment. The subsidy can be in a number of forms namely; direct transfers, income tax credit payments or a reduction in tax payments (National Treasury, 2011). The high rate of unemployment in South Africa suggests that there is low or insufficient demand for young workers. This then means that the labour market cannot absorb all the incoming jobseekers. As a result of such features of the labour market, an incentive scheme such as that of the employment subsidy has a potential of creating jobs as it encourages firms to higher young workers.

To explain how youth unemployment subsidies cause an increase in employment, the graphs below, named panel A and panel B will be used. The youth unemployment subsidies decrease the cost of labour, incentivising firms to use more youth labour since it is cheaper. At the individual firm level, the labour demand curve shifts downwards due to the decreased cost. When all the individual firms are observed together, a right shift of the aggregate labour demand curve (Ld) is seen. The initial Labour demand curve, Ld(W) shifts rightwards to Ld(W[1-s]) as a result of the subsidy. There is an additional multiplier effect as declining labour costs can lead to lower product prices and therefore higher demand (Katz, 1998). As seen on Panel A, both labour demanded and wages increase. The effect on wages and labour though depend on the sensitivity of labour demand and labour supply on wage changes (National Treasury, 2011). Panel A exhibits a general case with an upward sloping supply curve where the subsidy is shared between the employee and the firm. Panel B depicts the extreme case where there is a high level of unemployment. As a result, the wage level is fixed and the labour supply curve is horizontal (infinitely elastic). In this case, the subsidy has no effect on ages but a substantial effect on employment as increase in labour demand is not limited by rising wages (National Treasury, 2011).


Figure 1, taken from the National Treasury 2011

When designing employment subsidies, it is important to note that there are indirect consequences that can be observed that limit the increase in youth employment. These effects and consequences include stigma, substitution and displacement effects and deadweight loss (National Treasury). Deadweight loss from the subsidy occurs when a subsidy is paid to unemployed people that would have been hired regardless of the subsidy. Displacement effects occur when firms with subsidised labour increases its output, and displaces output with no subsidised labour thereby potentially crowding out employment somewhere else. Substitution effects occur when there are targeted subsidies. Firms may replace existing unsubsidised workers, who are not part of the target group, with subsidised workers. Subsidies may provide stigma effects if they are specific to certain socidemographic groups. This may lead to employers having a negative attitude and perception of the target group, limiting the impact of the subsidy (National Treasury, 2011).