Prospective analysis of a wage subsidy for Cape Town youth

• Published in: Journal of development economics Vol. 108; pp. 169 - 183
• Main Authors: Levinsohn, James, Pugatch, Todd
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.05.2014; Elsevier Sequoia S.A
• Subjects: Africa; Children & youth; Development economics; Economic equilibrium; Economic theory; Government subsidies; Job search; Labor economics; Labor supply; Reservation wages; South Africa; Studies; Subsidies; Unemployment; Wages; Wages & salaries; Youth; Youth unemployment; South Africa; Cape Town South Africa; Job search; O12; Labor supply; J64; South Africa; J68; Reservation wages; Youth unemployment
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/j.jdeveco.2014.02.006

Persistently high youth unemployment is one of the most pressing problems in South Africa. We prospectively analyze an employer wage subsidy targeted at youth, a policy recently enacted by the South African government to address the issue. Recognizing that a credible estimate of the policy's impact requires a model of the labor market that itself generates high unemployment in equilibrium, we estimate a structural search model that incorporates both observed heterogeneity and measurement error in wages. Using the model to simulate the policy, we find that a R1000/month wage subsidy paid to employers leads to an increase of R596 in mean accepted wages and a decrease of 12 percentage points in the share of youth experiencing long-term unemployment. •A model of job search with reservation wages fitted to South African data•An analysis of a wage subsidy in a search model with reservation wages•The prospective impact of South Africa's wage subsidy to youth