Evaluating the General Equilibrium Effects of a Wage Subsidy Scheme for South Africa

Unemployment among semi‐ and unskilled labour has reached severe proportions (over 50%) and threatens the political and economic stability of the South African economy. In this paper a computable general equilibrium (CGE) model of the South African economy is used to assess the effectiveness of a wage subsidy in raising employment of semi‐ and unskilled workers. We find that employment of semi‐ and unskilled workers can be raised quite significantly. Further, the wage subsidy schemes compares favourably with alternative welfare grant schemes in terms of employment growth. However, the results are sensitive to the targeting of sectors and the substitutability between labour of different skill levels.