Working paper

Estimating employment responses to South Africa’s Employment Tax Incentive

Joshua Budlender and Amina Ebrahim
July 2021

We present new evidence on the effects of South Africa’s Employment Tax Incentive (ETI), a hiring and employment wage subsidy aimed at reducing youth unemployment. We show that attempts to estimate firm-level treatment effects via conditional difference-in-differences are likely to fail when comparing ETI to matched non-ETI firms. We show that even when event-study conditional pre-trends appear flat, the sensitivity of these estimates to the matching period means that pre-trends are not informative about counterfactual post-treatment parallel trends, and a broad array of matching approaches do not create credible post-treatment counterfactuals. We argue that this is likely due to mean reversion among matched non-ETI firms. A partial identification approach based on difference-in-differences with parametric time trends suggests that the ETI has increased firm-level youth employment, though some important caveats apply. Our results prompt a re-evaluation of the (sometimes contradictory) existing literature on the employment effects of the ETI: we judge that, in light of our findings, there is insufficient evidence to conclude on its impact either way.

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