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Blog: 5 March 2017 (Employment in SA per industry and company size)
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In today's blog we take a look at employment numbers and with some trickery derive an estimate for Large, Medium and Small enterprises. Since an official estimate on employment per enterprise/company size is not available we will derive one using alternative data sources. The question we are looking to answer is whether small enterprises can assist in dealing with South Africa's persistently high unemployment rate and help in reducing the extremely wide inequality in South Africa.
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So with the Quarterly Employment Statistics (QES) as published by Statistics South Africa publishing employment per sector only, how does one go about estimating the employment per industry per enterprise size? Well luckily Statistics South Africa publishes a lot of other data that one can use to estimate the number of employees per industry per enterprise size.
We will use data published in the Quarterly Financial Statistics (QFS) per enterprise size to estimate the contribution of each enterprise size to the employment per industry. The Employment Cost per industry per enterprise size (in QFS) is used to calculate ratios which are applied to QES data to to derive an estimate of formal sector employment per enterprise size and industry. We take a look at the results below
We will use data published in the Quarterly Financial Statistics (QFS) per enterprise size to estimate the contribution of each enterprise size to the employment per industry. The Employment Cost per industry per enterprise size (in QFS) is used to calculate ratios which are applied to QES data to to derive an estimate of formal sector employment per enterprise size and industry. We take a look at the results below
Employment for All Industries
The bar chart below shows the employment per enterprise size for South Africa (as as September 2016).
From the bar chart above it is clear that large enterprises are by far the largest contributor to South Africa's formal sector employment with it employing 58.9% of all employees in the formal sector in South Africa. Medium enterprises only employing 8.9% of all formal sector employees and small enterprises employing 32.2% of all formal sector employees.
Worrying for us is the fact that medium sized enterprises are not contributing nearly as much as we would have expected it to. In the past we have mentioned that policies in South Africa either seems to focus on large or small enterprises with the medium enterprises not really having any policies covering them for the enhancement of improvement of their business operating environment. While looking at the overall number of employees is useful looking at the employment per industry per enterprise size should provide greater insights into South Africa's employment dynamics. We take a look below.
Worrying for us is the fact that medium sized enterprises are not contributing nearly as much as we would have expected it to. In the past we have mentioned that policies in South Africa either seems to focus on large or small enterprises with the medium enterprises not really having any policies covering them for the enhancement of improvement of their business operating environment. While looking at the overall number of employees is useful looking at the employment per industry per enterprise size should provide greater insights into South Africa's employment dynamics. We take a look below.
Mining and quarrying
The first industry we will take a look at is the Mining and Quarrying industry (once the shining beacon of South Africa's economy).
From the bar chart above one can see that employment in the mining and quarrying industry is totally dominated by large enterprises (with it 91.7% of total employment in the mining an quarrying industry), while medium and small enterprises contribute roughly 4% each to employment in this industry.
Manufacturing
The next industry we will take a look at is the Manufacturing industry. This is a sector who's relative importance in South Africa has been declining over time, as more and more manufactured goods are imported from the likes of China and Germany. In addition to this humans are being replaced by machines due to the rapid development of technology .
From the bar chart above one can see that employment in the manufacturing industry is totally different to that of the Mining an quarrying industry, with roughly 54% of all employees in manufacturing being employed by large enterprises while 33.1% are employed by small manufacturing enterprises with the rest (around 13%) being employed by medium enterprises.
Water, Electricity and Gas
The next industry we will take a look at is the Water, Electricity and Gas industry. This is a dominated by inefficient State owned enterprise ESKOM who basically has a monopoly on the electricity supply grid in South Africa and holds its citizens ransom by increasing electricity tariffs are rates fare higher than the official inflation rate, and consumers have no choice but to take the hit as there no other suppliers they can go to for their electricity. Only other option is to go "off the grid" by using solar power (but unfortunately this requires large financial outlays to start off with).
95.5% of employees employed in this industry is employed by large enterprises (and the majority of this would be ESKOM employees). This shows the significant problem this industry has, as there is no competition and with no formal competition and massive capital outlays required there are extremely high barriers to entry. And less competition equals less competitive prices. As the one that has the monopoly can charge what they want for their services since they the only ones supplying it. We therefore do not think this sector will provide an opportunity for strong employment increases in future (unless significant policy changes are made by the government of the day to allow greater electricity generation from Independent Power Producers (IPP).
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Construction
The next industry we will take a look at is the Construction industry. It has to be noted that a large number of employees in this industry are informal employees and they will not be accounted for as the QES measures formal sector employment (I.e employees on the company pay roll). We therefore believe the number of employees in this industry is significantly underestimated.
From the bar chart above one can see that employment in the construction industry is very evenly split between large and small enterprises, with them employing just over 40% and just over 38% respectively with medium enterprises employing around 20% of employees in the construction industry. The employment in this industry is a lot more evenly spread between the enterprises than say the Water, Electricity and Gas industry. This is one of the few industries in which small enterprises makes up almost as much as the large enterprises.
Trade (wholesale, retail and motor)
The next industry we will take a look at is the Trade industry. This includes wholesale, retail and motor trade industries. This industry is one of the largest employing industries in South Africa with it formally employing 1.914million people.
Of the 1.914million people employed just over 50% of the employees are employed by large enterprises, 40% employed by small enterprises and around 10% by medium enterprises. Again the medium enterprises are the stand out, as we would have expected a far larger contribution by these firms than what they are currently contributing.
This might be a case of a small number of very large retailers and wholesalers and then a large number of extremely small enterprises.
This might be a case of a small number of very large retailers and wholesalers and then a large number of extremely small enterprises.
Transport and Communication
The next industry we will take a look at is the Transport and communication industry, one of the smaller employing industries in South Africa.
Of the 442 000 people employed in this industry around 74% of them are employed by the large firms (think SuperGroup, Unitrans etc), and around a fifth of people in this industry is employed by the small enterprises and only around 4% employed by medium enterprises. Barriers to entry in this market is not as high as the Electricity industry and decent portion of employees in this industry comes from small enterprises. Potential for future increases in employment from smaller firms in this industry is there, and hopefully a few of the smaller firms morph into medium sized enterprises as this industry seems clustered around small and large enterprises.
Real Estate and Business Services
The next industry we will take a look at is the Real Estate and Business services industry which is one of the biggest employing industries in South Africa.
Of the 2,105million people employed in this industry just over a million is employed by large enterprises and just under a million being employed by small enterprises, with the rest being made up by medium sized enterprises. Its clear that small enterprises make a significan contribution to not only this sector's employment but to total overall employment (considering the fact that this industry employs just under 20% of all formally employed people in South Africa).
Community, social and personal services
The last industry we will look at is the community, social and personal services industry (largely made up by government). This industry is the largest employer in South Africa with it making up around 28% of total formal employment in South Africa. The concern with this is the fact that the state is the largest employer in South Africa while service delivery issues persist. Note this industry includes NGO's and charities. But their contribution to the overall level of employment in this industry is very small.
From the bar chart above it is clear that the big government departments and small municipalities make up the bulk of employees in this industry. This is one industry we would not like to see an increase in it's contribution to overall employment as the wage bill of the South African government is excessive and it needs to be curbed.
So to answer the original question, as to whether small enterprises can contribute to addressing South Africa's unemployment problems the answer is, absolutely. Small enterprises contribute 32.2% to the overall employment numbers in South Africa, which is a relatively large chunk. We do however feel that greater gains in addressing South Africa's unemployment levels can be made by setting policies that fosters growth of employment in large and medium sized enterprises. Since large enterprises are the largest contributor to South Africa's overall level of employment (with 58.9% of formally employed people in South Africa working for large enterprises).
The worrying part is the fact that medium sized enterprises only contributes 8.9% of total employment. The question is why? Are companies grouped incorrectly when calculating the estimates? I.e medium sized enterprises are incorrectly grouped into either small or large enterprises and the medium enterprises become the missing middle? Currently DTI cut off point for turnover is used to determine whether enterprises are small, medium or large. They are adjusted from base levels by Statistics South Africa to account for inflation for example, pushing up the levels company turnovers need to reach before being grouped into medium or large enterprises.
Or are policies that are currently in place only catering for the small and large enterprises? Should South Africa have a policy relook when it comes to the business operating environment? Are current policies prohibiting or stunting the growth of smaller firms into medium sized firms? The business environment reflects the household environment. How you ask?
Large number of small enterprises (large number of poor households), small number of large enterprises (small number of extremely rich households) and then basically a missing middle.
The next time the DTI decides to develop cut offs to group enterprises and develop policies for the enhancement of the business environment we suggest they look at addressing the missing middle.
The worrying part is the fact that medium sized enterprises only contributes 8.9% of total employment. The question is why? Are companies grouped incorrectly when calculating the estimates? I.e medium sized enterprises are incorrectly grouped into either small or large enterprises and the medium enterprises become the missing middle? Currently DTI cut off point for turnover is used to determine whether enterprises are small, medium or large. They are adjusted from base levels by Statistics South Africa to account for inflation for example, pushing up the levels company turnovers need to reach before being grouped into medium or large enterprises.
Or are policies that are currently in place only catering for the small and large enterprises? Should South Africa have a policy relook when it comes to the business operating environment? Are current policies prohibiting or stunting the growth of smaller firms into medium sized firms? The business environment reflects the household environment. How you ask?
Large number of small enterprises (large number of poor households), small number of large enterprises (small number of extremely rich households) and then basically a missing middle.
The next time the DTI decides to develop cut offs to group enterprises and develop policies for the enhancement of the business environment we suggest they look at addressing the missing middle.