Feature Article: Small firms: The backbone of any economy

Small firms have a major and essential role to play if we are ever to reduce unemployment in South Africa. So what is stopping them? The ‘hassle factor’ created by our labour laws. The difficulties they cause in the employment of unskilled people, particularly, prevents existing small firms from growing and flourishing and millions of potential new firms from ever being started.

Studies from around the world show that in most countries small firms employ the largest percentage of the total workforce.  Almost two-thirds of all jobs in the European Union are in small firms, mostly in firms with less than ten employees.

Unskilled people, generally, do not look to large firms or the government for employment. They usually approach small firms because they are more accessible, more conveniently situated in relation to their homes, more likely to take on staff for a trial period to test their capabilities, and more inclined to provide on-the-job training in a diversity of disciplines. Once a person has gained some skill and experience in a small firm, they are in a better position to seek and secure employment in a larger organisation. Some, in time, may even become part owners of the small firm employing them, or break away to start their own small business.

Without an adequate number of small firms in existence that are able and prepared to employ them, job-seekers today face the unenviable reality of there being just too many applicants for too few jobs. Why are there too few small firms to offer hope to our vast number of unemployed? And why are millions of small firms not employing more people?

High levels of regulation are the main cause. Stringent labour laws then aggravate the situation. Wherever there is a great deal of red tape and unreal minimum wage laws, even large firms tend to reduce their staff quotient and become more mechanised. Small firms, to avoid attracting the attention of labour unions and falling victim to myriad laws, resist expanding their operations and tend, wherever possible, to employ family members. However, any small firm that operates in an industry where there is a bargaining council also becomes subject to the same red tape as large firms. They then incur all the costs and management requirements imposed on big business. Not often understood is that these rulings apply to and affect not only the employers but also the employees.

If the labour legislation did not impose such difficult conditions, a person, unskilled or  with some characteristic that reduces the demand for their labour, would be able to settle for wages and working conditions that more realistically reflect the value in labour that they are able to deliver. This may mean having to accept compensation that is well below what would be considered a ‘living wage’. But they would be in a position to accept such a job and grab the opportunity to learn skills and build up an employment history, and especially, the most basic reason of all, to have a chance of having an income of their very own and food in their belly. The labour laws being applied to all members of the existing and potential workforce preclude people desperate for work, refuse them the right to negotiate and price them out of the market..

And the costs are not only in the wages. Stringent labour laws require dedicated overseeing and management. Small firms, including some that hire relatively large numbers of workers, often do not have personnel departments. An owner or other senior member of the firm does the hiring, and if the position to be filled does not require special skills, CVs and references may be dispensed with. The person doing the hiring will rely on his or her personal judgement, or on recommendations from existing staff, thus reducing the cost of hiring. However, when the small firm is subjected to onerous labour laws and the dismissal of an unsuitable person can be very costly, it has to change its hiring system and possibly its entire approach to labour utilisation.

The creation of a personnel department to handle labour law requirements will divert money available away from employing productive workers. It will be needed instead to pay for otherwise non-essential specialist personnel. Or such duties will interfere with the activities of the person or people who drive the business, which also will reduce a small firm’s output and efficiency. To lessen personnel requirements, a firm may resort to outsourcing work previously done by certain categories of employees. Alternatively, it may utilise machines and technology operated by more highly skilled, but fewer workers. A more drastic step would be for the firm to shut down its labour-intensive divisions, if not the company altogether.

All measures required to counter the ‘hassle factor’ created by the labour laws, especially in the employment of unskilled people, entails a reduction in the numbers employed. Overlooked is that job losses in this country are even greater than is superficially apparent. All of those potential new firms that never materialise represent an unquantifiable number of ‘invisible’ or ‘unseen’ job opportunities.

Removing red tape, especially the red tape to which small firms are subjected in the hiring of labour is one of the most urgent policy issues needing direction from government if it is ever going to boost our economy or take the interests of our 8 million unemployed to heart.

In an environment less dominated by unnecessarily stringent regulation, South Africa’s small firms could make a significant contribution towards reducing the number of unemployed people in the country. An environment conducive to entrepreneurship is also conducive to the establishment of small businesses. They are the backbone of any economy, whether developed or developing.

Author Joan Evans is the editor of FMF publications.  This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

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