Hiring by Smallest Employers May Signal Job Recovery

While forecasters expect the Labor Dept. report due out Mar. 5 to show that the U.S. economy is still shedding jobs, data from payroll companies suggest that losses at the smallest businesses have stopped and those businesses are beginning to hire.

Companies with less than 20 employees have been tentatively adding new jobs since June 2009, according to a new index by Intuit (INTU) released Mar. 1, based on data from 50,000 customers of the software maker's online payroll service. At the same time, a two-year slide in the average paycheck for workers at businesses with fewer than 100 employees has stabilized since December, according to data published Mar. 3 by SurePayroll. The average paycheck broadly reflects the number of hours employees worked. (Both Intuit and SurePayroll's data include salary, hourly, and contract workers.)

Brian Headd, an economist in the Small Business Administration's Office of Advocacy, says it's "definitely possible" that small businesses are now adding workers, even as net job losses in the economy as a whole persist.In a paper released Mar. 3, Headd notes that companies with fewer than 20 employees began creating new jobs in the 2002 recovery even as larger businesses continued to lose jobs. Companies with fewer than 20 employees make up 89% of all employer businesses and employ 18% of the private workforce, according to the latest Census data, from 2006.

Tax Breaks as Incentives

Policymakers desperate to put people back to work are weighing tax credits to encourage companies to hire. The House passed a $13 billion plan Mar. 4 that would give employers who hire people out of work for at least 60 days a year off from paying the 6.2% Social Security payroll tax. John Bishop, a labor economist at Cornell University's ILR School who co-authored a separate proposal for a hiring tax credit, says such temporary incentives succeeded in boosting employment in the late 1970s. Bishop calculates that a hiring tax credit could create more than 2 million jobs in a year. "It potentially has a huge effect, and small business would be the primary beneficiary of that," he says.

Some small businesses don't need incentives to hire. Michael McKean, CEO of Knowland Group in McLean, Va., has increased headcount from 38 to 48 since Jan. 1 and is trying to hire about six more staffers, including an in-house recruiter. The five-year-old company, with $6.2 million in revenue, makes sales, marketing, and lead generation products to help hotels land conferences and events. McKean, 40, says he thinks the hospitality industry—particularly business conferences—has hit bottom and is due to pick up. He also found a bank willing to increase Knowland's credit line from $150,000 to $300,000, which he has sought since 2007. The company's new hires will support new products and the opening of a Silicon Valley office in Sunnyvale, Calif.

The apparent growth doesn't signal a vigorous jobs recovery just yet. Intuit's payroll report shows employment at small businesses growing at a 1.1% annual rate since June. Extrapolating from that, Intuit estimates that companies with fewer than 20 workers have created 150,000 new jobs since June, including 40,000 last month. That's piddling in a downturn that has cost the U.S. economy 8.4 million jobs since it began in December 2007, according to the Bureau of Labor Statistics. Businesses of all sizes will have to start hiring to put the millions of unemployed back to work, but the payroll data suggest small companies are moving in the right direction.

A Real Inflection Point?

"The fact that wages have stopped declining and we've seen this slight uptick two months in a row is a very positive sign we are off the bottom and heading back up," says Michael Alter, president of SurePayroll. The company's data show average paychecks shrinking through the downturn until December, although SurePayroll also reported consistent increases in the number of workers on payroll. Alter says that indicates an increase in contractors and part-time employees working fewer hours.

Although the hiring recovery in the payroll data may appear small, it represents a real inflection point, not noise in the data, says Susan Woodward, a former economist with the Securities & Exchange Commission and the Housing & Urban Development Dept. who developed Intuit's payroll index. "There's lots of inertia in these numbers. These trends are not the kind of trends that turn around in a month," she says.

The payroll reports from Intuit and SurePayroll are based on data limited to those companies' customers, and they may not represent the small business sector as a whole. Another widely watched payroll survey, the ADP National Employment Report, has shown payrolls at establishments with fewer than 50 workers shrinking since early 2008, including a drop of 18,000 jobs in February. (The latest report shows an increase of 8,000 jobs among companies with 50 to 499 workers.)

Weaknesses in the Data

Two aspects of what ADP measures make it an imperfect gauge of small business hiring. First, ADP looks at establishments—that is, business locations—rather than discrete companies, so employment changes at individual Starbucks (SBUX) shops or Gap (GPS) stores, for example, show up in the "small business" category. Second, ADP's data are a snapshot taken each month, and businesses can switch from "small" to "medium" categories by adding workers. If a business with 49 employees one month hires one person and crosses the 50-employee threshold, that change shows up the next month as 49 fewer jobs in the "small" category and 50 additional jobs in the "medium" category.

Official data from the Labor Dept. on hiring by company size are still months away. Historically, companies with fewer than 500 employees accounted for 64% of net new jobs created between 1993 and 2008, according to an SBA analysis of Labor Dept. data. While net jobs may still be disappearing, if the payroll companies are right, the smallest businesses are beginning hire.

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