A review of international evidence on employment tax incentives implemented in special economic zones

Abstract

South Africa’s youth unemployment figure ranks among the worst in the world and is one of the country’s major macro-economic challenges. Research identified the most significant cause of youth unemployment as being the high cost of labour in relation to the level of productivity by the youth of the country. The government is consequently attempting to reduce the cost of labour by means of the Employment Tax Incentive Act which subsidises employers for appointing new workers below the age of 29. The study reviewed international research performed on similar globally implemented incentive programmes, which established that the majority of wage subsidy programmes do not appear to have a net positive impact on the longer-term employability of the participants in these incentives. This was found to be particularly so in the case of developing countries, such as South Africa. The interaction between the Employment Tax Incentive Act (No 26 of 2013) and the proposed Special Economic Zones Bill was also evaluated by reviewing international research on geographically targeted wage subsidies. The research identified that incentives tied to the number of new jobs created within targeted areas are able to raise employment levels within those areas. However, the increased levels of employment within targeted areas are frequently offset by the consequent decreases in employment levels in surrounding areas, resulting in an absence of net impact. The study also found that when geographically targeted wage subsidies are used in conjunction with other forms of business incentives, existing establishments are, resultantly, at a competitive disadvantage. This causes business closures and loss of employment, which once again neutralises the positive effects of the new employment opportunities created by the subsidy. In the study, it was established that wage subsidies, such as those proposed by the Employment Tax Incentives Act, are probably not the answer to raising employment levels. Furthermore, the Employment Tax Incentives, used in conjunction with the proposed Special Economic Zones Bill, are also unlikely to yield any significant increase in employment levels in these specific zones. Recommendations were made for future research relating to international experience with other forms of active labour market programmes and the outcome of the Employment Tax Incentives, on the country’s employment levels, when actual data and statistics become available.