JACQUES MORISSET: To reduce SA unemployment, make working more attractive
Social benefits can outweigh personal income tax and transport costs for low-income workers
At more than 30%, unemployment is SA’s biggest contemporary challenge. Of course, there are diverse reasons behind the incapacity of the economy to provide sufficient jobs for its working population, but allow me to focus on one: limited financial incentives for a poor South African to look for employment. The key question in SA is not why people are unemployed, but rather why they should work.
To answer this question, I simply calculate how much money a typical SA worker (let’s call him Dumisani) entering the formal labour market is expected to bring home in comparison with a Vietnamese worker (Danh). In our example, illustrated by the accompanying table, let us focus on taxes and transport costs. This comparison demonstrates that a low-income worker in SA has realistically few incentives to work, or at least far less than a worker in Vietnam, a country with rapid job growth.
For the same gross salary of $1,000 per month (about R19,140), Dumisani keeps in his pocket less than half of the money Danh would, because of higher taxes and transport costs. Unfortunately, Dumisani is not an exception as the personal income tax rate is set at 18% for those earning up to about $1,000 a month in SA, while it is only 5% (up to $215), 10% (between $215 and $430), and 15% (between $430 and $760) in Vietnam.
The personal allowance, which can be deducted from the tax payment for a single worker, is also slightly lower in SA ($400 versus $475). Other East Asian countries, such as Indonesia and Malaysia, also have personal income taxes with lower entry rates than SA.
Workers like Dumisani are also heavily penalised by transport costs due to long commutes between townships and industrial/business centres, as a result of the legacy of apartheid-era spatial planning. Two economists from the Harvard Growth Lab, Kishan Shah and Federico Sturzenegger, estimate that the average transport costs for those who are employed in SA are equal to 57% of net wages when time to commute is accounted for.
In Vietnam, the same cost is estimated at only 10% of net wages because of shorter distances and more competitive modes of transport, including motorcycles.
In his decision to work Dumisani will consider not only how much he will earn but also the amount of money that he could have expected to receive from the government were he not working. Like many low-income families he or a member of his household would have qualified for a form of social transfer (grants/subsidies) distributed by the government.
When becoming active in the labour market Dumisani could lose some of these social benefits, including unemployment insurance, the unallocated grants for low-income households (for example, the Covid-19 grant), and the provision of free public services (electricity, water) to “indigent” households. By contrast, Danh is unlikely to receive any transfers from the government as social support in Vietnam is limited to a few specific groups (war heroes and people living with disabilities).
Boosting employment could be achieved by changing the relative returns to a worker being active in the labour market versus being inactive. My argument is this can be implemented by three policy changes or strokes of the pen that mainly require political consensus, not additional money.
- The finance minister could initiate the first policy change by lowering the entry tax rate for personal income tax from 18% to say 5%, or increasing the threshold at which a citizen starts to pay personal income tax. This is the East Asian model described above. While the benefit of this action is evident for low-income workers (they will take home more money), the costs will be minimal to the government as SA’s top decile contributes almost 80% of personal income tax revenue anyway.
- The second policy change, which may be considered bolder and require concerted political will, would be for the authorities to modify existing social transfers to encourage poor workers to enter the labour market, including through reduced transport costs. A suggestion would be to replace (at least partially and for those ready to engage in work) the social relief of distress grant (about R350 a month), which was introduced as a temporary protective measure during Covid-19, with a direct subsidy that would help low-income workers keep more money in their pockets. The authorities could distribute a voucher through a phone application or an electronic card that beneficiaries could use to cover part of their commute costs. The amount of the subsidy could be adjusted to make the reform revenue neutral for the government.
- The third policy change will be to facilitate additional job opportunities closer to the homes of low-income workers — automatically reducing transport costs. This could be achieved by making it easier for existing small businesses to grow and operate, and for new ones to get started. Ecuador recently introduced a new type of company modality, the “Simplified Corporation Form”, available on a digital platform, leading to the creation of 43,000 companies in less than three years. Of course, the development of (small and micro) enterprises and self-employment — the main source of jobs in underserved areas — requires additional measures such as improvement in infrastructure, better access to finance and skills, but this could be a starting point.
These short-term solutions are attractive because they encourage poor people to look for jobs and self-employment opportunities by making the relative price of labour more attractive in SA. They also send an immediate signal about the government’s willingness to help disadvantaged workers get more money in their pockets. However, in the longer run, the country’s ability to generate jobs will largely be determined by workers’ mobility, especially in urban areas where three-quarters of the labour force are concentrated today.
Overhauling the urban public transport system, which is notoriously unreliable, unsafe and largely unregulated in the case of the taxi industry, and the development of new housing communities closer to industrial and business centres, will therefore have to be in the mind of every policymaker who wants to tackle the unemployment challenge in SA.
• Morisset is World Bank lead economist and programme leader for Southern Africa.
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