Small businesses and informal sector biggest employers: ILO
A new study by the International Labour Organisation (ILO) reveals that self-employment, and micro and small enterprises play a far more significant role in job creation than previously believed. Data gathered in 99 countries, including South Africa, shows that these businesses – described as small economic units – account for 70% of total employment, which makes them the most important drivers of employment.
GROUND-BREAKING DATA SHOWS THAT THE FUTURE OF JOBS LIE WITH SMMES WHICH URGENTLY NEED COMPREHENSIVE SUPPORT
The Small Matters: Global Evidence on the Contribution to Employment by the Self-Employed, Micro-Enterprises and SMEs report says this new data means that it is even more essential for countries to better understand the challenges facing these employers.
“One of the main conclusions is that understanding the reality faced by small economic units is key to addressing the fundamental challenges of employment creation and job quality improvement. Supporting small economic units should be a central part of economic and social development strategies worldwide, but especially in low- and middle-income countries,” the document reads.
The report is in line with comments from the government and other stakeholders that SMEs are vital to kickstart the economy. They include tech start-ups, which are starting to receive more support from the South African government, other countries and venture capitalists who believe they are a solution to the country’s unemployment crises, have the potential to develop new business models and can drive entrepreneurship. The ILO’s Small and Medium Enterprises Unit Head, Dragan Radic, describes the study as ground-breaking.
“To the best of our knowledge, this is the first time that the employment contribution of so- called small economic units has been estimated, in comparative terms, for such a large group of countries, particularly low- and middle-income countries,” he says.
The data is drawn from national household and labour force surveys, instead of using the more traditional source of enterprise surveys, which the ILO says tend to have more limited scope. All regions except North America were surveyed. The report finds that in high-income countries, 58% of total employment is in small economic units. In low and middle-income countries, the proportion is considerably higher.
The South African SME Fund, which is a collaboration between the government, labour and business to address some of the most pressing challenges to the country’s economic growth, estimates at in 2018 small and medium enterprises employed between two and three million full-time employees. The government’s National Development Plan predicts that SMMEs will generate 90% of the 11 million new jobs aimed for by 2030.
The ILO’s new data also provides empirical evidence that many of these employers across the globe are mainly in the informal sector.
“This finding is highly relevant to the design of programmes aimed at promoting job creation, start-ups, and the formalisation of enterprises and of the workers they employ. Key aspects of the world of work such as job creation, job quality and enterprise productivity, need to be considered from the perspective of the smallest economic units, for these represent the largest share of employment,” the report reads.
The ILO says it is vital that there is a sense of urgency in seizing the opportunities and addressing the challenges surrounding small business units. Also, a greater understanding is needed to ensure that there is a right balance between job quantity and job quality. “Whilst there is solid empirical evidence that micro and small enterprises are major drivers of job creation, it is still not well understood how differences in the size of enterprises affect the quality of the jobs they offer,” the document reads.
“Moreover, decent work deficits are more pronounced in the informal economy where the smallest firms tend to operate. Further empirical research is required on job quality in small enterprises and on how the dynamics of firm growth relate to job quality. Is it, for example, realistic to expect a large number of micro-enterprises to grow and achieve formality, or is there a way of identifying the few enterprises that are likely to grow and channelling support to these?”
SUPPORT FOR ENTERPRISES
The report says an enabling environment for Micro Small & Medium Enterprises (MSMEs). Must also include institutional mechanisms, laws and regulations. This will be easier if these enterprises are included in employer and business membership organisations, which usually have the ear of governments. This move will help establish a conducive business environment, facilitate access to finance, which is one of the main reasons why start-ups fail in South Africa, and, where necessary, encourage enterprises to transition to the formal economy.
The ILO calls on trade unions to start and continue advocating for an inclusive policy framework for micro and small enterprises and support their formalisation. The reason for this is that decent work deficits such access to social protection, denial of workers’ rights and insufficient employment opportunities are generally more pronounced in smaller enterprises.
Also, extending collective agreements to all workers in the relevant sector, irrespective of their employment status (formal or informal), is essential to reduce decent work deficits. However, the document does admit that a more thorough examination is needed of the best ways of organising and representing workers in micro and small enterprises. It is imperative that factors which affect production are understood, including those at enterprise level like labour and management practices, and external factors such as regulations, access to finance and digital infrastructure, and the availability of skilled labour.
“Given the prevalence of informality among the self-employed and micro and small enterprises, it is important to identify ways of fostering their development and growth, and of enabling them to create decent job opportunities. Experience has shown that the transition to formality is best achieved through an integrated and long-term approach rather than through short, piecemeal interventions,” the ILO says.
The collection of information and better-quality data is essential to accurately determine the extent of employment of different sized enterprises. This will help governments, employers’ and workers’ groups, donors and implementing agencies better support these businesses. The ILO says the environment must not be ignored.
In order to seize the new business and market opportunities, governments and social partners can work together to provide targeted business information and advice on green business practices, eco-innovation, regulatory systems, and on how to achieve compliance in easily accessible formats such as user-friendly toolkits.
By: Amy Musgrave
Micro-enterprises are defined as having up to nine employees, while small enterprises have as many as 49 employees.