Evaluating the General Equilibrium Effects of a Wage Subsidy Scheme for South Africa

The unemployment rate among semi- and unskilled workers in South Africa is over 50%. This high rate can be attributed to various factors, including political decisions of the past, educational inequalities, and poor economic growth. These factors have contributed to the structural unemployment problem in South Africa. The real cost of labour and in particular that of semi- and unskilled workers has also increased dramatically. This could be a further incentive for firms to hire fewer semi- and unskilled workers.

Investment in human capital is imperative, as this will increase the income earning potential through higher skilled employment. However, in the short run this may not be enough. A wage subsidy has been proposed as a further incentive for firms to employ more semi- and unskilled workers. This type of subsidy lowers the cost of employment to the firm while maintaining the wage of the worker. It is a tool that is equally useful in reducing unemployment and improving the distribution of income, particularly when semi- and unskilled workers are targeted.

The outcome of various wage subsidy experiments are analysed using a CGE model. This class of multisector model is useful for evaluating the impact of policy tools that can have economy-wide effects. The simulations suggest that employment can be raised quite significantly, with important benefits especially for poor households.

The cost of employment subsidies can be substantial, depending on the extent of the target group. However, it is argued that the benefit of increased employment justifies the cost. It is shown that although the negative indirect effects of raising funds for the scheme, either via an increased budget deficit or increased taxation, counteract the positive impact of an employment subsidy scheme, the net overall benefits are positive. All modelled household groups increase their income, while all industries are able to employ more workers than before.