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Citation Information

Type Working Paper - University of Maryland, Department of Economics Working Paper
Title Failed promises of a wage subsidy: youth and South Africa’s employment tax incentive
Author(s)
Publication (Day/Month/Year) 2020
URL http://econweb.umd.edu/~aflagah/files/Kodjo_JMP.pdf
Abstract
Young people face unemployment rates two to four times those of older workers. Youth unemployment is particularly severe in South Africa, where 52 percent of those between ages 15 and 24 are unemployed. To address this issue, South Africa has introduced a subsidy that offsets firms' costs for wages paid to young workers hired after October 2013. Firms can receive tax credits that cover up to half the wages paid to a young worker. While similar wage subsidies have been used in other middle-income countries, there is little evidence about their efficacy, especially when implemented at a national scale. I estimate the policy's effect using a difference-in-differences strategy based on age-eligibility restrictions and the start date. During the first year of implementation, being eligible for the subsidy did not increase employment for age-eligible workers relative to a slightly older cohort. My estimates rule out effects as small as 1 percentage point. This limited result comes despite widespread utilization of the subsidy, which was extended twice past its expiration date. As the decrease in firms' costs did not induce them to hire more young workers, attention should be focused on other constraints that prevent such workers from being employed, such as their skills or labor market regulations.

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