Underemployed at 17% Reflects Small Business Rebound With More Part-Timers

Lee and Kate Amon, owners of Internet retailer Kate’s Caring Gifts, say they’d need a 50 percent increase in sales before adding a full-time employee.

The Fremont, California-based couple has two part-timers who handle orders for organic food baskets and natural soaps because “it gives us the flexibility to add or subtract their hours,” said Lee, 54. “It costs us about the same to hire one full-time person. But if that person gets sick, we’re toast.”

As the U.S. economy gains momentum heading into 2011, small-business employment is lagging behind other drivers of the recovery. While past rebounds were led by companies with fewer than 500 people adding full-time workers, some owners say they’ll rely on part-time help and push their staffs to be more productive as they wait as much as a year for demand to improve. This has helped keep unemployment near a quarter-century high, even as household purchases have risen for five straight months.

“I’m not sure we’ll ever return to the type of full employment we’ve had in the past,” said Charles McMillion, president and chief economist at forecasting firm MBG Information Services in Washington, who has studied labor markets for 30 years. Employment conditions like those of 1999, when the jobless rate was as low as 4 percent, won’t occur “for a very long time, if ever,” he said.

Investors are “rewarding” the efficiencies small businesses adopted to battle the recession because the changes have gone “hand and hand with better profitability,” said Michael Shaoul, chief executive officer of New York-based Oscar Gruss & Son Inc., which provides research to institutional investors.

Rising Shares

The Wilshire Micro-Cap Exchange Traded Fund, which includes companies with fewer than 500 workers and tracks shares of the Wilshire Index’s 2,500 smallest stocks, has outperformed the Standard & Poor’s 500 ETF Trust since Sept. 1, rising about 33 percent compared with the trust’s 19 percent.

Small businesses “definitely have cut costs in terms of reducing workforces,” so when “you do get demand rebounding, their margins are going to be expanding and that makes a lot of these companies attractive,” said Joseph Kremer at Fifth Third Asset Management in Cleveland, who helps oversee $250 million in small- and micro-cap stocks and recommends Old National Bancorp in Evansville, Indiana, which is acquiring Monroe Bancorp of Bloomington, Indiana. “That’s good for their efficiency, but not necessarily good for the unemployment rate.”

The jobless rate probably dropped to 9.7 percent in December from 9.8 percent the previous month, and total nonfarm payrolls increased by 140,000, according to the median estimates of economists surveyed by Bloomberg News ahead of a Jan. 7 report from the Labor Department.

Underemployment Rate

Meanwhile, underemployment was 17 percent in November, up from 8.8 percent when the recession began in December 2007 and near the 17.4 percent peak in October 2009. This comprises people without jobs and those who have given up looking, as well as those who want full-time employment but settle for part-time.

Many of the latter are “in trouble in terms of paying the bills” even though they are “still going to work day to day,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “Underemployment is a big part of the picture if we want to get a full sense of whether we’re fully utilizing our resources.”

The high underemployed rate means that “economic growth is, and will continue to be, very lethargic,” said Sung Won Sohn, an economics professor at California State University- Channel Islands and former chief economist at Wells Fargo & Co. As a result, Federal Reserve monetary policy “will have to remain very accommodative, with interest rates near zero for at least the next couple years.”

Expanding Economy

The economy grew at a 2.6 percent annual pace in the third quarter, compared with a 5 percent rate in October-December 2009, the government reported last month.

Underemployment also affects consumer spending, which accounts for about 70 percent of the world’s largest economy, according to economist Scott Brown at Raymond James & Associates Inc. in St. Petersburg, Florida.

“Once employees get hired on a full-time basis, they’re probably going to be more willing to spend money and make long- term commitments like buying a car or a home,” Brown said. “It’s a lot harder to do that with a part-time status.”

Spending has begun to accelerate, rising at a 2.4 percent pace in July-September, the fastest since the first three months of 2007.

Fired Six

Josh Frey, chief executive officer of On Sale Promos in Washington, fired six of seven full-time sales people in 2008 after the number of clients dwindled by 50 percent. When he offered to keep the employees on as independent contractors, all accepted, he said. Since then, Frey has cut costs on benefits, payroll taxes, trash removal, electric bills and a $3,000-a- month office lease for his business, which puts corporate logos on T-shirts, mugs and pens.

“The recession definitely made me take a pause in terms of wanting to hire,” said Frey, 39. “I’m so much more able to be nimble and flexible because I now have options to contract more talent.”

He’s unlikely to add full-time workers even after business improves because “I’ve never been more profitable,” he said. “We’re sitting on more than double the amount of cash than we’ve ever had.”

Brennan Industrial Truck Co. in Holland, Ohio, which sells forklifts and repair parts, would need a 10 percent sales gain for six consecutive months before hiring a new employee, said owner Jim Brennan, 48.

‘Ground Zero’

“By virtue of where we are located, we were kind of at ground zero of the automotive problems,” Brennan said. The second half of 2009 improved and then “the first quarter of 2010 was pretty bad again.” His family’s company, founded in 1957, has been “overall healing” ever since, and some of its 25 workers are getting overtime hours for the first time since 2007.

MIPS Technologies Inc. has relied on “multiple strategies” to fill its administrative needs, including making some positions part-time, said Chief Financial Officer Maury Austin. The Sunnyvale, California, company, which has about 150 employees, started hiring full-time engineers and software developers, and “we are well-positioned to continue to grow in 2011,” he said.

Small businesses have added jobs every month since March, including a 54,000 gain in November that was the biggest since the recession began, according to ADP Employer Services in Roseland, New Jersey, which doesn’t distinguish between part- time and full-time workers.

Increase Staff

A November survey by the National Federation of Independent Businesses, which also doesn’t differentiate between types of employment, showed that 9 percent of businesses intend to increase staff, up 1 percentage point from the prior month.

Nancy Traversy, 50, owner and co-founder of Barefoot Books Inc. in Cambridge, Massachusetts, began hiring in mid-2009 and has boosted her payroll to 41 workers from 31 because of “a combination of increased sales and increased investment,” she said. When the finance department at the children’s book publisher recently took on a part-time worker, it was because “we only really needed a part of a person.”

Policy discussions in Washington -- whether related to tax cuts or changes in health care -- played no role in her decision-making, Traversy added.

‘Fewer Taxes’

“Companies will hire and build product if there’s demand, period,” said Lee Amon of Kate’s Caring Gifts. “Everybody would love to pay fewer taxes, but that’s not the determining factor.”

Stirling/Brown Architects in Winchester, Massachusetts, laid off two of its five full-time employees in December 2008 and then brought them back on a part-time basis, said President David Stirling. While he won’t be able to add full-time staff until there’s another “good-sized project” in the range of $1 million to $3 million, part-timers will get first preference, he said.

“I feel an allegiance to people who work here,” Stirling said.

To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.