The role of small firms in employment

This policy bulletin is an extract from Jobs for the jobless: Special exemption certificates for the unemployed (published 2003)

Small firms have a key role to play in reducing unemployment in South Africa. Studies have shown that in most countries they employ the largest percentage of the total workforce.  Two-thirds of all jobs in the European Economic Area and Switzerland, for example, are in SMEs (small and medium enterprises) employing 0 – 249 employees. By contrast, SMEs employ only 33% of the workforce in Japan and 46% in the USA. (European Communities, 6)

South Africa’s small firms employ slightly more than 50% of the total workforce but our data are not strictly comparable with figures from other countries because South Africa’s small firms are classified differently. For instance, South African firms that employ 100 or more workers in the agricultural, retail and motor, wholesale, catering and accommodation, and finance and business services sectors are defined as large firms, as are firms in these sectors with fewer than 100 employees but with turnovers or total gross assets exceeding the minimums stipulated in the National Small Business Act, 1996. Utilising the same straightforward measure of 0 to 249 workers used by the EU, South Africa’s SMME sector would be considerably larger.

While these numbers give us an insight into the structure of an economy, they do not tell us why there are so many small firms in the EU and especially why 93% of them are micro enterprises with fewer than 10 employees. (European Communities, 4) High levels of regulation, and especially labour regulation, could possibly be responsible for this phenomenon. In business environments characterised by stringent labour laws, small firms tend, wherever possible, to employ family members and to avoid expanding to the point where they attract the attention of labour unions.   

In the absence of regulatory barriers, unskilled people do not generally look to large firms or the government for employment. They usually approach small firms, which are more  accessible, often more conveniently situated in relation to their homes, more likely to take on staff for trial periods to test their capabilities, and more inclined to provide on-the-job training in a diversity of disciplines. Once they have gained skills and experience in small firms, workers are in a better position to secure employment in large organisations.

Some employees may in time become part owners of the small firms employing them, or break away to start their own businesses. Yet without adequate entry points – that is, without an adequate number of small firms able and prepared to employ them – job-seekers face the unenviable reality of too many applicants for too few jobs. And if they are unskilled, or have other characteristics that reduce the demand for their labour, they will be forced to settle for wages and working conditions that reflect the value in labour they are able to deliver. This may mean having to accept compensation that is well below what would be considered a ‘living wage’. An unemployed person or first-time job-seeker would accept such a job for several reasons, including the opportunity to learn skills and build up an employment history, or for the most basic reason of all, expressed in the old adage that ‘half a loaf is better than none’.  

Small firms hire fewer people when the laws become onerous Small firms hire fewer people when the laws become onerous

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, the firm has to change its hiring system and possibly its entire approach to labour utilisation.

If the firm decides it needs to create a personnel department to handle labour law requirements, it will have less money available for employing productive workers, which will reduce its output and efficiency. It may outsource the work previously done by certain categories of employees, or alternatively, utilise machines and technology operated by fewer more highly skilled workers. Another alternative would be for the firm to shut down its labour-intensive divisions altogether.

All approaches to the problem of reducing the ‘hassle factor’ created by the labour laws, especially in the employment of unskilled people, entail a reduction in the numbers employed. Job losses are even greater than is superficially apparent because of the many potential new firms that may have been started, and that may have employed unskilled people, but never do so. The latter are the ‘invisible’ or ‘unseen’ job losses that are not quantifiable and tend to be overlooked.  

Source: This policy bulletin 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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