The Myth of “Job Creation”

SOUTHERN AFRICAN FREIGHT TRANSPORT INSTITUTE

In the current economic climate, there is considerable discussion about “job creation” and the need to provide employment for the large numbers of unemployed young people. There appears to be the impression in certain circles, that jobs can be “created”, in isolation from business start-ups and expansions although this is very evidently impossible.

The linkage between business activity and job creation is unavoidable as it is only in government, and possibly parastatals, that “positions” can be created without attendant need for economic outputs.  Within the ambit of commercial business the potential for creating jobs is totally dependent on the extent of demand for production of goods and services.

The inescapable fact that demand for products or services is the starting point in the job creation cycle, is largely ignored by the central planners with the result that they continually support the creation of completely unviable entities that have no economic future, almost invariably fail, and often never repay the money invested. This is particularly evident in the large numbers of failed “agri-businesses” and property development schemes all over the country. It is further aggravated by the willingness of banks to lend to “connected people” on the basis of their government connections or contracts.

In so far as demand for products is the determinant of the size of the job market, it is clear that demand for, mining products, manufactured goods and agricultural crops in South Africa is limited by our ability to produce at prices that are competitive with imports from other countries. We are a net (and growing) importer of foods, machinery, vehicles, and consumer goods due to lack of competitiveness.

Entrepreneurs take on considerable risks in starting brand new businesses to produce goods or services into a market where there is already competition, fluctuations and considerable amount of uncertainty. This is one of the reasons why business start-ups are difficult and often unsuccessful. The National Small Business Chamber (NSBC) estimates that over 80% of small businesses collapse within the first year of activity and only 10% are still in existence after 3 years.

When starting businesses in the real business world, all risks, borrowings and uncertainties accrue to the entrepreneurs as well as all liabilities for costs incurred for hiring of premises and equipment, staffing, compliance with regulations, etc. There is of course no certainty that the business will succeed and there is no safety net to ensure that payments will be made to all sources of finance. Up to this point the entrepreneur is risking all, the potential employees are not involved and there is no government hand-out and any profits will be taxed.

During the process of starting the new business, one of the major hurdles to be overcome by the entrepreneur is the serious restrictions and interventions of government in aspects of regulation of property, labour, taxation and levies, penalties, utilities charges, and fees for a range of governmental interventions. The interventions by government and the high cost of banking and finance form major barriers to effective small business creation in South Africa as has been noted by entities such as NSBC and other economic commentators. For small businessmen attempts at leveraging finances incur massive liabilities and introduce a maze of bureaucracy.

One of the major hurdles in getting established is the matter of staffing the organisation.  Typical basic organisation structures, in most industries, tend to take on a triangular shape with limited numbers of owners, managers or experts at the top of the structure and increasing numbers at succeeding lower layers of skills or responsibilities. The typical organisational structure of a small manufacturing concern is illustrated below.

Small Business Organisation

The diagram illustrates very simply another major obstacle to creation of jobs in South Africa. That is the inability to start businesses due to the intense shortage of educated, trained, and or experienced people competent to lead, direct and manage organisations. The skills and knowledge required to start and run the business are generally vested in level D , and it is therefore clear if people with skills and abilities are not available at this level it is impossible to employ the people at the lower levels. Without the D band, there will be no employees in C, B and A Bands. The ratio of A and B, to C and D are often 25:1 or higher, so a lack of 40 Cs and Ds prevents employment of 1000 lower level workers.

A further point that can be made with reference to the diagram is that the D Band entrepreneur is responsible to pay all commitments to labour, borrowings, rentals etc, before drawing any salary himself. Therefore increases in the costs of utilities, wages, fuel etc., have direct impact on his own pocket, unlike the paid managers of larger firms earning set salaries. For larger businesses it is easier for managers to accede to union and regulatory pressures for wages and conditions as the decisions have no direct impact on their salaries. These are undoubtedly the main reasons why very limited numbers of South Africa’s instant millionaires actually take on the pain of starting new businesses and employing people; it is much easier to sit on the boards of going concerns.

Another feature of the job market when there is limited skills availability is that there will be disparity of earnings, with skilled workers being paid more and lower level jobs being worst paid and most easily replaceable.  For small businesses, enforcing minimum wages or other attempts at forcing employers to pay more, merely applies pressures on the business owners to the point of no return. If costs of wages eliminate business profits they lead to closures and less start-ups.

In terms of national policy, South Africa has aggravated the problem of job creation by selectively marginalising and exporting significant proportions of the population that could have been employed in the D band, due to restrictive legislation. Education policy has added to the unfortunate fact that the major proportion of the unemployed population only have capabilities suitable for A and B band positions, but have been led to expect unrealistic earnings. As the creation of jobs is dependent on the availability of managerial and supervisory skills, the job market will continue to be limited and South African industries will be increasingly vulnerable to competition with imports from more effective economies.

At the present time the only growth “industries” for employment in South Africa are the financial sector, trade, and government, with all primary production sectors being relatively flat or decreasing. The government currently employs more people than any of the private economic sectors (about 25% of total employed, or more if parastatals are included), and at higher salaries. In addition the government is attempting to support the entire non-working population by the system of pensions and grants, which is patently unsustainable. There is a critical need for urgent action by industry and government to create real employment initiatives instead of perpetuating the myth that mandatory wages levels and government subsidies can solve the problem. The NDP is a formidable sweeping wish list for the future, but only real business level interventions can grow our economy and create profits and jobs.

There is crucial need for focused government support for entrepreneurs [of all colours], to start real businesses, not finance for friends and relations. The widely discredited spatial development policies of the 1990s were effective in creating employment as they promoted industrial development by assisting entrepreneurs to build profitable businesses. The demise of the programme has left huge wastelands of collapsed business districts such as Babelegi, Mafikeng, Tshiame, Madadeni and Isithebe, where there were once jobs for locals.

Solutions will require a multifaceted approach including the following:

  1. Scrap attempts to force businesses to pay unaffordable wages.
  2. Scrap attempts to force businesses to give away equity.
  3. Revise education policy by privatising schools and revising curricula.
  4. Reduce the size and costs of government at all levels
  5. Rein in the costs of banking and finance
  6. Simplify tax laws and reduce tax levels for small businesses
  7. Re-examine the options for lessening the import impacts of globalisation.
  8. Review all state owned and subsidised businesses for competitiveness.

Each of these measures has specific options for implementation; a process of examination and introspection is needed to plan for change, and it is urgent if we are not to be simply overrun by more efficient producers, both by imports and by buy-out of local opportunities.

Safti

9 June 2014