Impact| Increasing Number of Social Grants on Unemployment Rate

South Africa, a country facing profound income inequality, overwhelming poverty rates, and rising inflation, has incorporated one of the world’s most extensive social grants systems. Since its implementation, its advocates have been arguing about the grants designed to eliminate poverty and help redistribute the nation’s income. However, the real question is whether these grants help spur economic growth and mitigate unemployment.

Social grants have undoubtedly helped millions of South Africans survive this economically disturbing time. However, the notion that it helps reduce unemployment and stimulate economic growth is untrue. So, let’s dig into the broader implications of expanding the grant system and its potential consequences for economic growth.

The Impact of the Increasing Number of Social Grants on Unemployment Rate

South Africa has a comprehensive system of social grants designed to provide financial support to vulnerable and poor citizens of the country. These grants are administered by the South African Social Security Agency SASSA, a government agency that manages social assistance programs in the country. Furthermore, various types of social grants target different groups of financially unstable people.

The Child Support Grant is a means-tested grant given to caregivers of children under the age of 18. As its name indicates, an old age grant is given to South Africans who are 60 or more years old. Similarly, the disability Grant is designed to provide a fixed amount of money to those who have some disabilities, which stops them from supporting themselves.

There are war veterans grants, grant-in-aid, foster child grants, care dependency grants, and Social Relief of Distress (SRD). SRD is a short-term relief for basic needs like food, clothing, and shelter. Apparently, all these grants seem to be a lifesaver for the vulnerable group in society, but they can stop them from looking for a permanent solution to their financial situation.

The President Cyril Ramaphosa’s Perspective: Grants as Growth Stimulus

President Cyril Ramaphosa endorses the idea that social grants, especially the Social Relief of Distress (SRD), can enhance economic growth and employment prospects. He addressed this idea as “stimulating growth from the bottom up” and justified it by stating that over 18 million people receive social grants in South Africa, and this can reduce their poverty along with providing much more positive effects. Similarly, this concept comes from the idea that income redistribution through grants can reduce income inequality and stimulate economic activity.

This misconception is flawed and needs to be critically examined. The process of providing through grants does not occur without consequences such as higher taxes or interest rates, which negatively impact the overall economic growth. Furthermore, the unemployment rate will automatically increase as economic growth is negatively impacted.

Social Grants and Unemployment Rate

According to research ‘Social Grants, Livelihoods and Poverty Responses of Social Grant Beneficiaries in South Africa,’ an extremely low level of formal employment of social grant beneficiaries is recorded. The employment rate went from 5% in 2008 to 11% in 2017, which means only 6% in the course of 9 years. Furthermore, this is not a significant increase in the employment rate, which means the grants might have prevented the increase in the employment rate.

Similarly, the informal employment rate of social grant beneficiaries increased from 31% in 2008 to 34% in 2017. However, due to the COVID-19 pandemic, it declined to only 23% in 2020 but rose again to 31% in 2021. This means that there is no overall increase in the informal employment rate.

This data shows that the president’s implications of social grants reducing unemployment are misleading because the employment rate increased by a tiny percentage. Similarly, the increase was short-lived, and after a year of receiving the grant, the recipients were no longer likely to be employed. This means the grant recipients managed to survive on the grant amount without trying to find employment, which would have been possible if they were left to support themselves.

The Impact on Non-Recipients

As discussed earlier, the social grant funds have to come from somewhere, and usually, it is provided through increased taxes. This creates distress among middle-class citizens because they believe increasing social grants money by millions is the reason behind their huge taxes. Moreover, this is partially true because the funds can either be collected from interest or tax money.

On the other hand, people who receive social grants have ready access to money due to the opportunities provided by the commission. However, this is at the expense of non-recipients, who are less likely to be employed due to no access to social grants. This, in some senses, means that the grant recipients have the advantage of finding employment faster as compared to the non-recipients.

By this logic, everyone should receive grants to have equal opportunities to find employment. However, then everyone would be at the same pace, and the employment rate would remain the same because job opportunities are less as compared to population growth. So, this brings us back to our question: are social grants helping to increase the employment rate? The answer is now more apparent than ever.

Grants Primarily Allocated to Non-working Beneficiaries

Mostly, the direct grant recipients are already non-working beneficiaries and cannot participate in the jobs. For instance, an old age grant is given to citizens who are at least 60 years old and cannot find or continue employment at this age. Furthermore, the indirect recipients of this grant may take advantage of this and refuse to find a job.

Additionally, the disability grant is also aimed at people who cannot work due to a permanent or temporary physical disability. Empirical studies suggest that this kind of grant either has a negative effect or no effect on employment. Furthermore, some studies suggest up to a 20% reduction in employment probability.

Grants Reduce Employment Probabilities

Research shows that even though grants effectively reduce poverty, they tend to reduce employment probabilities as well. For instance, individuals with lower educational attainment tend to avoid labor and leave employment because the small amount they earn through their jobs is given to them through social grants. If they find employment, they will no longer receive the unemployment grant, so why not opt for the easy option?

Similarly, beneficiaries receiving larger grants tend to avoid finding jobs because they already live comfortably. As the grant grows, negative associations increase; those with the most significant grants are 10% less likely to have a job than those who do not get any grant. Similarly, people with less education are 8 to 10% less likely to be employed than non-recipients.

Social Grants Lead to Increased Dependency

If the social grants continue expanding at the current rate, it may lead to an increased sense of dependency among the recipients. Furthermore, social grants always carry the risk that the beneficiaries may become reliant on this financial assistance, which can lead to discouraging actively seeking employment. Similarly, it can become a hindrance in the overall economic growth.

Furthermore, if a large portion of the country heavily relies on social grants rather than participating in the labor market, it can burden the economy. Similarly, this ultimately slows progress and development while draining out the national treasures.

The easy availability of larger social grants can also pose a threat to employers as potential workers choose to live on social grants instead of finding employment. Similarly, it can discourage people from excelling in education and skill development because they can easily rely on social grant money for survival.

The Reality: Grants as an Anti-Poverty Tool

Social grants are not completely bad because, in reality, it is the most convenient anti-poverty measure and the best way to redistribute income. However, it is essential not to see it as a step to reduce unemployment or stimulate economic impact growth. Furthermore, when you look at it from this perspective, it starts to become problematic because no country should invest more than it affords on social grants.

This leads us to think about a realistic approach to reduce unemployment and increase economic growth. The best way to achieve these goals is through employing a multifaceted strategy. Furthermore, this strategy should include improving education quality, enhancing public transport, implementing housing policies to promote access to economic opportunities, and creating an environment supporting business growth and job creation.

What is the negative impact of social grants?

The negative impact of social grants is dependence on state-provided welfare and an increase in unemployment.

Who introduced social grants in South Africa?

A national government agency, the South African Social Security Agency (SASSA), is responsible for implementing and administrating social grants in South Africa.

In essence, the increasing social grants have a negative impact on the unemployment rate; it either remains the same or increases in most cases. The policymakers view social grants as a shortcut to increasing employment and economic growth. However, this misleading notion needs to be studied and replaced.

The rapid expansion in social grants is risky because both direct and indirect recipients are learning to rely on these funds instead of participating in work. Furthermore, the percentage is especially high in people who do not have higher education degrees and can only earn through labor. So, the crux of the matter is South Africa needs more jobs and quality education, not social grant beneficiaries.