Effects of Employment Tax Incentives on Employment Free Samples

Question: Discuss about the Effects of Employment Tax Incentives on Employment. Answer: Introduction: A big number of youth in South Africa have been excluded from participating in economic activity. Because of this, they suffer disproportionately from lack of employment leading to discouragement and being marginalised economically. The levels of unemployment among the youth is high meaning that many of them are not getting the requisite skills and experience that is vital for economic growth. This deficiency can have adverse effects on the economy of the country in the long run. The current rigidities of regulations in labour policies coupled with the lack of skills and experience in employees makes prospective employers to be reluctant in hiring the young people. However, with the adoption of the employment tax incentive the employers have been granted an opportunity to boost employment by hiring young job seekers(Mac-Ikemenjima, 2015). An employment tax incentive (ETI) is an incentive whose aim is to encourage employers to hire more employment seeking youth. In South Africa, the ETI program was implemented and took effect from January 1st, 2014. It is offered through the youth wage subsidy. In the program, employers receive incentives that will enable them to hire and train young candidates to work for them (Moneyweb, 2017). The unemployment rate in south Africa has increased significantly over the past two decades despite the government efforts to reduce unemployment as well as employment opportunities increasing. The youth in particular the school leavers are the most affected with unemployment levels among them going over the roof. A number of reasons have led to this broad increase in unemployment. One likely reason is the quality of education being offered. It has been observed although it offers a marginal advantage, that simply holding a matric does not guarantee one a job. This is contrary with a functional labour market where education should impart skills required by employers to sort potential employees in to the job market according to their abilities. The dire situation is proved by the high unemployment rate among the matriculates, which stood at 27.1% in 2015. Another reason for high unemployment is that it is no longer easy to secure employment in the most developed provinces of the Weste rn Cape and Gauteng. Actually, these provinces recorded the highest unemployment rates compared to other poorer provinces (Moneyweb, 2017). The government has put so much effort in trying to reduce unemployment but the labour market is still going through a hard time. There is need for progressive changes in the education system by improving quality of education and improving the resources in schools. Another solution is the ETI that will increase demand for young employees. ETI is a targeted wage subsidy that facilitates transition of the youth from school to work. It features a probationary period during which the employees are monitored and can be appraised or fired according to the employers discretion. Many countries favour a fiscal policy where taxes are imposed on the wages of employees in the formal sector. This tends to discourage employment in the formal sector. It as well leads to potential employers seeking other alternatives to labour and they end up investing more in capital intensive production instead of creating opportunities for employment. A wage subsidy works on the opposite of the wage tax. A wage subsidy increases the demand for labour through reducing the cost of hiring employees, hence increasing employment in the formal sector. Although this policy will cost the treasury, it will favour labour over capital. Apart from reduction in costs of labour, other benefits that the employers will enjoy from a youth wages subsidy in South Africa include: The incentive is provides a 24 month period during which the employers can claim the incentive from the government. The employers will be able to share the cost of employing the youth with the government. This is through the reduction of the Pay-As-You-Earn (PAYE) rate from the wage but leaving the wage intact. i.e. the PAYE is reduced while the wage received from the employer is not affected. The incentive amount varies depending on the wages that each employee is paid and on the period of the ETI program during which the employee was hired. ETI works in line with other government programs that bear the same objective such as the learnership program, which improves the way in which employees are trained. The wage subsidy targets the youth and thus it makes hiring the youth more attractive compared to hiring those who are not in this age subset. There is a tendency among the school leaving youth of avoiding to get into employment. However, once they secure a job, they will end up remaining employed even if it will be at a different job from the one they entered through. This could be part due to firms refusing to incur the expense of training the labour force when they know the labourers will then move on to another form of employment. A wage subsidy is the best solution to this issue. The subsidy also addresses the costs to the society that are related to high unemployment rates among the youth such as crime drug abuse and prostitution. ETI has a benefit that arises from the substitution effect. The substitution effect arise where the employee has to choose between work and leisure. It comes into play when the wages increase and the worker and the employee will find that working is more profitable than leisure and hence he will prefer to seek employment rather than having to spend time out of employment. The higher the wage, the more the hours the employee will be willing to work. ETI reduces the tax on wages and thus the employer can afford to pay the employees better. In this way, more youth will be willing to seek employment because the prospects of being employed are relatively better than those of not being in employment. Conclusion ETI creates employment for the youth by creating a large number of jobs that will reduce youth unemployment in South Africa in a big way. It is a cheap and effective method of creating more job opportunities in comparison to other similar government programs. In addition, the youth will be in employment for longer periods. Thus, the introduction of ETI is an opportunity to evaluate, improve, and come up with better ways of alleviating unemployment in South Africa. References Casde, K. E., Fair, R. C., Oster, S. M. (2017).Principles of macroeconomics. Mac-IKEMENJIMA, D. (2015). Youth wellbeing in South Africa : what dimensions should we measure?Commonwealth Youth and Development.13, 1-17. Moneyweb. (2017). How two crucial trends are affecting unemployment in SA. [online] Available at: https://www.moneyweb.co.za/news/south-africa/two-crucial-trends-affecting-unemployment-sa/ [Accessed 24 Apr. 2017].