In order to encourage employers to employ the youth of South Africa, the Government has introduced the Employee Tax Incentive (ETI) Act, with effect from 01 January 2014. This is commonly referred to as the 'Youth Wage Subsidy'. The intention is that any employer who employs a 'youth', defined as a South African citizen between the ages of 18 and 29 years old, on or after 01 October, 2013, for the first time in a full-time position within the business will be entitled to apply for tax relief on that employee's wages, according to the following rules:

The employee must earn a basic salary of at least the minimum rate of pay as prescribed by any prevailing legislation for the job, or if this is not applicable between R2000 and R6000 per month.

If an employer displaces an existing employee to replace him with a qualifying employee a penalty of up to R30 000 can be imposed and the employer may be barred from making further use of the ETI scheme. The employer will be entitled to reclaim 50% of the wage payable up to R2000, and a flat rate of R1000 for wages between R2000 and R4000 per month, and a lesser amount thereafter on a declining scale from R4000-R6000 during the first year of employment. This incentive will drop to 25% in the 2nd twelve months of employment. There is no limit to the number of 'qualifying employees' an employer may employ. However, the incentive will not apply to the employment of domestic workers, or any person connected with the employer, (e.g., family members). In order to obtain the rebate, the employer must register the employee on the South African Revenue Services (SARS) website using form EMP201 and complete a monthly return.

QUESTIONS:

Imagine your team is part of a commission that investigated the policy options to ease the challenge of youth employment and labour practices in the South African economy as mentioned in the extract. You have been requested to report in assignment essay format to parliament on your investigation:

Question 1

In your report on the investigation process and findings discuss at a theoretical level how tax incentives operate within an economy. Illustrate and discuss the possible effects of such incentives on the employers and the welfare of employees.

Question 2

Discuss the possible employment effects of wage subsidies reported in the extract taking into account the age groups, skills endowments and substitution effects of the various workers in an economy.

Question 3

Using the AD/AS model, discuss alternative supply side policies that can be implemented to stimulate the economy of a developing nation.