Sluggish SME Development Hurts Jobs and the Economy
With more than 201 million workers unemployed in 2017 – an increase of 3.4 million compared to 2016 – enterprises, particularly small and medium-sized enterprises (SMEs), play a crucial role in creating decent jobs around the globe.
Between 2003 and 2016, the number of full-time employees within SMEs nearly doubled, with the share of total employment attributable to SMEs rising from 31% to 35%, according to the ILO’s World Employment and Social Outlook 2017: Sustainable Enterprises and Jobs.
However, in the past year, their contribution to total employment has stagnated. Between 2015 and 2016 the contribution of SMEs to total employment remained virtually unchanged, increasing from 34.6 to 34.8%.
According to the report, private sector enterprises accounted for the bulk of global employment in 2016. These enterprises employed 2.8 billion individuals, which represents 87% of total employment. While permanent full-time employment in SMEs grew more than in larger firms between 2003 and 2008 – on average 4.7 percentage points higher in small and 3.3 percentage points higher in medium-sized enterprises – employment growth premium of SMEs was absent during the period between 2009 and 2014.
“To reverse the recent trend of employment stagnation in SMEs, we need policies to better promote SMEs and a better business environment for all firms, including access to finance for the younger ones,” said Deborah Greenfield, ILO Deputy Director-General for Policy.
In developing economies, SMEs account for 52% of total employment, compared with 34% in emerging economies and 41% in developed economies.
Job dynamics among young firms in terms of full-time permanent employment have also weakened since the global financial crisis, the report says.
The full-time permanent employment growth rate among young firms was on average 6.9 percentage points higher than for established firms during the pre-crisis period, but the difference declined to 5.5 percentage points in the post-crisis period. This change reflects developments in the overall business environment, whereby new and younger firms have been shedding jobs at a much faster pace than before.
Investing in workers key feature of sustainable enterprises
The report also finds that providing formal training for permanent employees is associated with higher wages, higher productivity and lower unit labour costs, while increasing the use of temporary employment is associated with lower wages and lower productivity, without any implications for unit labour costs.
Evidence indicates that, on average, enterprises that provide formal training to their full-time permanent employees pay 14% higher wages, are 19.6% more productive and have 5.3% lower unit labour costs, compared with those that do not offer training. Alternatively, on average, having a higher share of temporary employment by 10 percentage point is associated with lower average wages by 2.6% and lower productivity by 1.9%, which thus does not give competitive advantage in terms of their unit labour costs.
Innovation and trade boost jobs and productivity
The report finds innovation is an important source of competitiveness and job creation for enterprises. Innovative firms, overall, tend to be more productive, create more jobs, employ more educated workers and offer more training. They also hire more female workers.
In some cases, however, innovation has led to more intensive use of temporary workers (particularly, in firms with product and process innovation) and to higher concentration of women in temporary employment. For example, firms implementing product and process innovation tend to employ more temporary workers than non-innovators by over 75%.
Trade and engagement in global supply chains are also important stimuli for job creation and productivity growth. As trade has stagnated in recent years, so too has trade-related employment. In 2016, 37.3% of workers were employed in private formal exporting firms. This share is lower than the pre-crisis share of 38.6%. The report notes that trading firms have higher productivity and pay higher wages than those firms not engaged in trade.
However, the productivity premiums for exporting and importing outweigh the wage premium by 13 and 5 percentage points. This indicates that there is scope to share gains from trade in a more inclusive manner.
SMEs important source of female employment
The ILO research shows that full-time female permanent employees in the formal sector are more likely to be found in SMEs than in large firms. On average, and across all regions, around 30% of full-time permanent employees in SMEs are women, compared with 27% in large enterprises.
Moreover, the share of women’s employment, particularly in SMEs, is strongly correlated with the per capita income of a country. Greater numbers of women in enterprises may therefore have a positive impact on growth and development, because micro-enterprises and SMEs often offer women an entry point into the formal labour market.
Finally, the ILO’s flagship report insists on the key role of social dialogue between governments, employers and workers for enterprise sustainability.
“While governments play an important role in shaping institutions that boost sustainable enterprises and inclusive growth, workers and their organizations advocate appropriate policies and regulations as well as representation. Through these concerted actions, sustainable enterprises can foster equal employment opportunities, workers’ protection and rights, and invest in workers as well as other important factors of production,” concluded Greenfield.