Small businesses are still hungry to hire, but many workers eye better pay elsewhere

Small and midsize firms remain eager to expand their workforces, but economists say many jobseekers are likely chasing higher pay at larger companies with deeper coffers.

Employers with fewer than 1,000 workers posted the lion’s share of job opportunities in February, the federal Job Openings and Labor Turnover Survey showed Tuesday. Filling those positions, though, is a different matter.

Private employers added 184,000 workers in March, more than expected and up from 155,000 in February, payroll processor ADP said Wednesday. But it also found that smaller companies — those with workforces ranging between 20 and 49 — shed 11,000 positions last month, the only subset of employers to do so. Even the smallest employers, with 19 or fewer workers, added 27,000 positions.

“The challenge, especially for the smallest businesses, is that this is a competitive labor market still,” ADP chief economist Nela Richardson said during a conference call Wednesday. While 2024 kicked off with a spate of high-profile layoffs and it’s taking longer for many jobseekers to land gigs, demand for workers remains strong.

It’s easier to hire, but it’s not easy to hire.

ADP Chief Economist Nela Richardson

For many employers, “it’s easier to hire, but it’s not easy to hire,” Richardson said.

The ability to offer competitive pay might be a factor. ADP found many workers across the economy are seeing their wages rise faster than inflation. Those who changed jobs between February and March netted average raises of 10% since the same period last year, while those who stayed put saw pay jump 5.1%. The pace of consumer price increases clocked in at 3.2% in February, the latest government inflation data showed.

Richardson speculated that the drop in some smaller businesses’ hiring could reflect jobseekers following the dollars. The steepest pay increases last month were among firms with between 20 and 499 employees, ADP data shows, indicating many small and midsize companies are pushing to lure hires in a tight market — and possibly trying to close the gap with bigger rivals.

“Workers maybe shifted to larger firms where they could potentially make more money,” she said. Another possibility is that many small and midsize firms “simply didn’t want to hire.”

But plenty still do, even as the race for talent cools down from its red-hot levels earlier in the pandemic recovery, and they have for some time. Small businesses played an outsize role in the increase in job vacancies over the last three years, said Tuan Nguyen, U.S. economist at financial services firm RSM. Many, however, are “constrained by their limited resources” and still “face prolonged challenges in recruiting qualified candidates,” he said.

They’ve been competing for talent amid a post-pandemic startup boom that has helped juice the broader demand for labor, contributing to shortages in some sectors that still haven’t been erased. New business formations in 2023 averaged nearly 500,000 each month, a sharp jump from the 300,000 monthly average just four years prior, Nguyen said.

A climate of high interest rates “further exacerbates the challenges for small businesses,” which often face higher borrowing costs than larger companies, he added.

Federal Reserve Chairman Jerome Powell reiterated Wednesday that the central bank likely remains on track to lower interest rates “at some point this year,” an expectation Wall Street investors widely share. But Powell emphasized, as he has for months, that he’d need to see more evidence of inflation trending down toward the Fed’s 2% target.

Uncertainty around the timing of rate cuts will cast a long shadow over the Bureau of Labor Statistics’ March jobs report, set for release Friday morning. If the labor market stays too hot for the Fed’s liking, it could hold off lowering rates out of concern that speedy wage growth would prop up inflation.

But most experts foresee job gains continuing to slow over the course of the year amid steady economic growth. Economists surveyed by Dow Jones expect U.S. employers to have added around 200,000 roles last month, below February’s gains of 275,000.

“Demand for labor remains above pre-pandemic levels,” Nguyen said, “providing reason to expect a healthy labor market in the first half of the year.”

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