Louw Pienaar

Position: Senior Agricultural Economist

Institution: Western Cape Department of Agriculture

Expertise: Agricultural Development and macroeconomic research

Louw is an agricultural economist at the Western Cape Department of Agriculture at Elsenburg. Working in the division for macro and resource economics, he is involved in multi-sector analysis and research on economic impacts on agriculture in South Africa and the Western Cape. He is interested in rural development and the role of agriculture in development and food security. Louw holds a M.Sc. in agricultural economics at the University of Stellenbosch and have been involved in research with the Bureau of Food and Agricultural Policy (BFAP) since 2010. Other fields of study include International Trade, Livelihood and Poverty analysis and Labour market outcomes within an agricultural context.

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Editor's Corner

Does the ETI work?

The Employment Tax Incentive is probably one of government’s most determined interventions in the labour market to combat the crisis of chronic high youth unemployment in South Africa.

Introduced in 2014, it effectively offered employers a tax incentive if they hired young people at a salary of less than R6500 a month. Youth unemployment is not only a problem for the present, as the SA Revenue Service pointed out, it has severely adverse consequences for the future economy. A generation of young people are not acquiring the skills necessary to enter the labour market, and they risk long-term unemployment. In 2019/2020, tax credits worth R4.8 billion were paid out to eligible firms.

But how do we measure its success? Has it been effective in encouraging firms that would have otherwise been hesitant, to hire young people? The question is an important one because the policy costs the fiscus a significant amount in foregone revenue.

The real challenge, as Joshua Budlender and Amina Ebrahim point out in this edition of Econ3x3, is how we measure its effects. Their article is based on a research paper for the Southern Africa Towards Inclusive Growth (SA-TIED) /UNU-WIDER programme and is available here: https://sa-tied.wider.unu.edu/article/estimating-employment-responses-south-africas-employment-tax-incentive.

Generally, economic policy analysts have used the Difference in Differences (DiD) method to compare a “control” group with a “treatment” group – that is to compare the employment outcomes of those who are eligible for the ETI with those who are not. Early analyses compared individuals – specifically those who were younger (the “treatment” group) with older workers (the “control” group). These analysts did not find a significant difference in employment outcomes between the two groups.

Later, though, analysts compared firms that opted into the ETI with those that did not. Some found positive effects – employment increased faster at firms that claimed the ETI. But as Budlender and Ebrahim point out, firms have different characteristics so they have to be “matched” to compare like with like. This produces its own challenges. The authors used data from the Treasury-SA Revenue Services to show that the firms that hire more young people tend to have diverged from those that don’t even before the ETI was claimed.

Does this mean the ETI does not work? The problem is that the methods of analysis do not leave us with easy conclusions. The ETI was a well-intentioned initiative to boost private-sector hiring of young people. But policymakers need to weigh up the costs with its outcomes. Certainly, as Budlender and Ebrahim suggest, we need to more carefully evaluate the longer-term effects of the ETI before it is extended again.

We also draw attention to the important article in the last edition of Econ3x3 by Harald Winkler and Anthony Black on why our high rate of carbon emissions in international terms and our high rate of unemployment are inextricably linked.

State support, both during and after apartheid, has largely gravitated towards capital-intensive industries that are also high energy users. This mitigated against smaller industries in the light manufacturing sector that could have created more jobs. Based on a longer research paper (available here https://www.uj.ac.za/wp-content/uploads/2021/10/sarchi-wp-2021-06-winkler-and-black-september-2021.pdf), Winkler and Black point out that South Africa ranked 17^th in the world for annual Greenhouse Gas Emissions in 2018, extraordinary for a mid-level economy such as ours. Moreover, our unemployment rate (if one includes discouraged workers) grew to 44% in the immediate post-Covid19 period, a “social, economic and political disaster of immediate concern”.

South Africa’s relatively cheap coal-based electricity is a thing of the past. Yet industrial development strategy, even well into the democratic era, was based on this assumption. Renewable energy, although officially part of part of government policy, has grown slowly, and under the Zuma administration in particular, there was strong resistance to implementing the Independent Power Producers Programme (IPP) .

Government needs to forge bold and creative policies to shift support to low-emissions manufacturing. This will not only help combat climate change, but can also support a transition to a more equal society.

Pippa Green, November 3, 2022

Working Papers from the REDI3x3 project are available HERE

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Articles

Does the ETI work?

READ, WRITE & REASON

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