The South African government is hoping that small businesses can help tackle the country's pervasively high unemployment. But it won't be easy going. The share of jobs by small firms there has declined faster than in a number of other countries since the 2008 Global Economic Crisis.
FM, a financial magazine, revealed in an article last week that South African small firms had shed over a million jobs between 2008 and last year. But in this South Africa is not alone. Small businesses in several countries have lost employment share since the crisis.
While the total employment share of those employing 50 or fewer employees declined slightly in the US and the UK, it dropped significantly in Chile and most notably in South Africa.
In the US the employment share of these small firms dipped from 27.7% of all private-sector jobs in 2008 to 27.6% in 2011. In the UK and Chile the decline was slightly higher - from 47.9% to 46.2% and 36.6% to 35.3%, respectively over the same period. In South Africa the decline was from 71% to 68%.
Fall in micro enterprises job share
Much of the drop in small business employment figures in South Africa (like in the US) can be attributed to a decline in the job share of those firms employing 10 to 49 employees (see the below table). In South Africa this share fell from 34% to 28% of total employment in firms over the 2008 to 2011 period, far greater than in the US or in Chile where it also fell. In the UK the share climbed by 0.4%.
While the different definitions for each country for small, micro and medium enterprises make it difficult to draw comparisons, figures suggest that in at least two further emerging economies employment share in the sector has fallen since 2008.
In Georgia the employment share of SMEs (firms with less than 100 employees) tumbled from 48.3% of all jobs in 2005 to 38% in the first quarter of this year. In Brazil SMEs (those with less than 500 employees) saw their share in jobs in the private sector decline from 54.5% in 2005 to 51.7% in 2012.
However in Malaysia SMEs’ (firms with up to 150 employees) share in employment increased from 56% in 2009 to 57.5% in 2013 (according to reports by its small business agency for 2012/13 and 2011/12).
What's driving job decline in small firms?
Some have suggested that SME's decline in employment share is due to the 2008 Global Economic Crisis.
But in the US the job share for small businesses (firms with 500 or fewer employees) has been in decline for at least two decades. According to some the decline is linked to fewer big companies shedding jobs. But what explains the fall in these other countries, particularly in South Africa?
In South Africa the decline comes despite a Statistics South Africa survey last year which revealed that following the 2008 recession firms with less than 10 employees created the most jobs in the majority of the country's provinces between the third and fourth quarter of last year.
A report last year from small business researchers SBP from a survey of 500 firms reveals that the employment share of those firms employing less than 10 and those with 10 to 49 started off matching one another in 2002, at 27%.
As the decade progressed, the 10 to 49 category began to account for an increasing share of the total, reaching a high of about 37% in 2007. However it's then, at about the time of the Global Financial Crisis, that the share of employment in these SMEs falls sharply, and it is passed by that in larger firms.
Perhaps small businesses are not too good at creating jobs after all. A report last year - by Andrew Kerr, Martin Wittenberg and Jairo Arrow - revealed that when both the number of jobs created and destroyed is taken into account, small firms in the long run destroy more jobs than large firms do. The trend mirrors developed countries, at least according to a 2009 paper by US entrepreneurship expert Scott Shane.
Bargaining councils to blame?
South African economist Neil Rankin has suggested that bargaining councils are to blame for the declining share of jobs in small business. He says bargaining councils are estimated to be associated with seven to 16% lower employment in small firms.
Bargaining councils hold small businesses back because they mandate small and large businesses to pay the same wages and benefits. Agreements are negotiated by employer associations and trade unions and then extended to non-party firms, which are often smaller firms.
But the Word Bank argues in a recent report that bargaining councils can explain only a small part of South Africa’s high unemployment rate of 25%. It says given the number of workers employed in industries covered by collective agreements, eliminating the employment effect of bargaining councils would reduce the unemployment rate by 1.5% at the most.
It points out that the relatively small size of the informal sector compared to other countries at a similar development level. Apartheid, while making it effectively illegal for black Africans to run their own business, left a legacy of high transportation costs for the unemployed, who tend to live far from where the jobs are. So South Africa’s job creation problems may stem primarily from urban issues, it argues.
The young ones
What a recent report using OECD data points out is that firms that are five years of age or younger contribute positively to aggregate job creation in nearly every period and country considered. But this is only true if they are able to survive their initial years. This is where South Africa and Chile lose out. Both have high failure rates (see this earlier article).
It doesn't just help to encourage more people to start small businesses, as has been popular in Chile and South Africa of late. Less red tape and better access to finance and business skills are also needed to get going again when they fail. Like this more can hope to create firms that survive and create jobs.
Sources: Chile: Las empresas en Chile por tamaño y sector económico desde el 2005 a la fecha; South Africa: Developing a new path for SMEs in South Africa; UK: Department for Business Enterprise and Regulatory Reform statistical releases for 2008 and 2011 and US: Small Business Administration firm size data
Stephen Timm is a