Why Small Business Won't Be Hiring

If the 10% jobless rate is to continue falling, economists say small businesses need to begin hiring. But a surplus of underutilized workers and tepid entrepreneur sentiment suggest small businesses will be unusually timid about bringing new employees on board.

To be sure, the worst of the small business job losses seems to be over. According to Automatic Data Processing's (ADP) National Employment Report, companies with fewer than 50 workers slashed just 75,000 jobs in October, down from 288,000 in March. Midsize companies also shed 75,000 jobs in October, while big companies cut 53,000.

Small companies historically begin hiring first in a recovery. But this time many economists expect any pickup to be belated and weak. One big reason is the credit crunch's outsize impact on entrepreneurs. Douglas Duncan, president of Anaheim Hills (Calif.)-based Almond Hill Enterprises, a two-person software company, wants to hire, but, he says, "I can't get the funding."

Other small companies have plenty of slack. The average paycheck for the 25,000 small business clients of payroll processor SurePayroll fell 7.3% for the year through October, says President Michael Alter. That reflects, in part, a heavier reliance on independent contractors, he says. Cuts in workers' hours are also helping shrink small-company paychecks. When demand picks up, entrepreneurs will pile more work on existing workers rather than hire. "I think you'll see a jobless recovery," says Alter.

One reason could be business owners like Daniel W. Glier, president of Glier's Meats, an 18-person, $3 million sausage maker in Covington, Ky. He's keeping headcount down by restoring some workers' hours that got cut earlier this year. He's also using temps so that if he has to let them go, his unemployment insurance premiums won't rise. "I'm not going to stick my neck out right now and hire people," he says.

The weak recovery is a concern, too. The optimism index compiled by the National Federation of Independent Business has edged up from its March nadir. But at 89.1, the index has been below 90 for six straight quarters. In the 1980-82 recession, it fell below 90 only once. An October survey by credit-card issuer Discover Financial Services (DFS) found that the biggest worry for entrepreneurs is the outlook for sales—even ahead of their usual bugaboos, taxes and health insurance. Until sales improve, hiring will be scarce.

Return to the BWSmallBiz December 2009/January 2010 Table of Contents

Before it's here, it's on the Bloomberg Terminal.