The small business sector’s contribution to job creation in SA has been grossly overestimated, claims an economics professor who has produced new data suggesting that there has been a hollowing out of employment by small companies in recent years.
University of Stellenbosch economics professor Neil Rankin says companies with 50 or fewer employees could account for less than half the employment share than is commonly believed.
Using South African Revenue Service data from the 13.4-million IRP5 certificates filed in the 2015 tax year, Rankin says these companies contributed just 21% of formal sector jobs.
Stats head concedes error
Statistician-general Pali Lehohla (pictured above) concedes that the survey - which the Department of Small Business Development uses to estimate the employment contribution of small businesses - has "potentially" overestimated the contribution of the sector.
Rankin disputes the accuracy of the Quarterly Labour Force figures by pointing out that employees of large companies often report working for a smaller one if their branch or unit has less than 50 people. IRP5 data, he argues, do not have that reporting bias as they are submitted by companies and not employees.
Some workers file multiple IRP5 certificates if they work for more than one company, which could distort the figures. But Rankin does not believe there are many such workers.
'IRP5 also problematic'
However, Lehohla points out that using IRP5 data to calculate the employment contribution of small companies also has challenges. For example, the data are likely to include company shareholders as they, too, are obliged to file an IRP5 certificate on the receipt of any dividend. And one person can file several IRP5 certificates.
He says some companies with fewer than 50 employees might have an annual turnover so large that, in terms of the Small Business Act, they would be defined as a big business.
To better measure the employment contribution of small businesses, Lehohla says Stats SA needs a sufficient budget to conduct a regular survey of employers and the self-employed to measure the contribution of the informal sector. The last time Stats SA conducted such a survey was in 2013.
This, Lehohla says, should be used to complement the Quarterly Employment Survey, which measures only VAT-registered companies — which he describes as "a more accurate way to measure employment contribution than the Quarterly Labour Force Survey".
'SME sector shrinking'
Rankin also finds that there has been a decline in wages paid by companies employing less than 100 people (particularly those with 50 to 100 employees).
In a working paper published in September, Rankin found labour productivity since 1994 had risen faster in small companies than larger ones.
Smaller companies might be substituting labour and becoming more capital-intensive. However, the change in capital stock is similar across all companies, which means that the change in labour productivity is caused by lower-paid jobs dwindling in smaller firms.
"I don’t think the evidence is conclusive, but this seems to be the most likely explanation given all the data," Rankin says. He adds that other factors, such as outsourcing and the use of technology often being conducive to higher-skilled small businesses, should also be considered.
His analysis of post-apartheid labour market surveys shows that, at both the bottom and the top, wage distribution has increased but in the middle (and thus the median) salaries have remained fairly constant.
"In the ‘normal’ case in a country, you see wages rise with the size of the company. In SA, there is a U-shape, which was not there in the 1990s," Rankin says.
Report supports findings
A 2013 working paper by Andrew Kerr, Martin Wittenberg and Jairo Arrow for the University of Cape Town DataFirst project, backs the finding that smaller companies are shedding more jobs than creating them.
The university’s research shows that between 2005 and 2011, companies with between one and 19 employees destroyed more jobs than they created, while there was zero net job creation at companies employing between 20 and 49 employees. Only companies with 500 or more employees saw net job gains.
Most jobs losses — a third in companies with 50 or fewer employees — resulted from the small companies going out of business. Only 7% of the jobs lost at companies with 5,000 or more employees were from firm closures.
Rankin believes that SA does not have a very coherent jobs strategy. "We kind of want everything without explicitly acknowledging the trade-offs that exist," he says.
"On top of all of this we have the fourth industrial revolution, which will change the nature of work substantially in some occupations. No policies seem to be thinking explicitly about this."
Informal sector left out
LabourNet director Sean Snyman points out that IRP5 figures do not capture the large number of working people in the informal sector, which he believes might be expanding.
The use of labour brokers by small companies could explain their lower contribution to employment, he adds. It is estimated labour brokers employed 970,000 people in 2014.
However, Snyman says that with the 2015 amendments to the Labour Relations Act, which prohibit employers from using contract employees who earn below R205,000 a year for longer than three months, the use of labour brokers is "basically dead".
Labour lawyer Michael Bagraim of Bagraims Attorneys says the labour regulations limiting the use of contract employment compel more companies to enter the informal sector. He says many are opting to go underground, particularly if they operate in a sector with a bargaining council. "I’ve heard this story a few times," he adds.
National Employers Association of SA CEO Gerhard Papenfus says a large number of the 3,000 metal and engineering sector employers his association represents can’t afford to pay high wages. "A lot of businesses are flying under the radar," he says.
Apparel Manufacturers of SA executive director Johann Baard says increasing informality is a worldwide challenge in the manufacturing sector. In SA, only half of all clothing manufacturing companies in the nonmetro areas of KwaZulu-Natal are compliant with wage agreements, he says.
While no one can say for sure whether small businesses are shedding jobs on a large scale or not, Lehohla concedes that estimates for the employment contribution of small business undermine the veracity of statistics for the sector. But he says although Stats SA has the expertise, they do not have the funds to fix the problem.
This story originally appeared in Business Day (go here for the original version). Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a