Small Business Is Hiring, but Very Carefully

Lee and Kate Amon, owners of Internet retailer Kate's Caring Gifts, say they would need a 50 percent increase in sales before adding a full-time employee. The couple, who live and work in Fremont, Calif., have two part-timers handle orders for organic food baskets and natural soaps because "it gives us the flexibility to add or subtract their hours," says Lee. "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, small business employment is lagging behind other drivers of the recovery. Past rebounds were led by companies with fewer than 500 employees as they added full-time workers. Now 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. "I'm not sure we'll ever return to the type of full employment we've had in the past," says Charles W. McMillion, president and chief economist at forecasting firm MBG Information Services in Washington, who has studied labor markets for 30 years.

In the first 12 months following the recession that ended in November 2001, small businesses added 81,000 workers. After the most recent downturn, companies cut 480,000 during a comprable time period, according to data from ADP Employer Services. "Normally we look to small firms to account for a lot of the job growth," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla.

Instead, investors are "rewarding" the efficiencies that publicly traded small businesses adopted to battle the recession, says Michael Shaoul, chief executive officer of New York-based Oscar Gruss & Son, which provides research to institutional investors. Since Sept. 1 the Wilshire Micro-Cap Exchange Traded Fund (WMCR), which includes companies with fewer than 500 workers and tracks shares of the Wilshire Index's 2,500 smallest stocks, has gained around 33 percent, vs. 19 percent for the Standard & Poor's 500 ETF Trust.

Small businesses "definitely have cut costs in terms of reducing workforces," says Joseph Kremer at Fifth Third Asset Management in Cleveland, who helps oversee $250 million in small- and micro-cap stocks. "That's good for their efficiency, but not necessarily good for the unemployment rate."

Underemployment was 17 percent in November. That includes people without jobs and those who gave up looking, as well as those who work part-time but want full-time jobs. Many of the latter are "in trouble in terms of paying the bills" even though they are "still going to work," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

Josh Frey, chief executive officer of On Sale Promos in Washington, fired six of seven full-time salespeople in 2008. When he offered to keep the employees on as contractors, all accepted, he says. Since then, Frey has cut costs on benefits, payroll taxes, trash removal, electric bills, and an 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," says Frey, 39. He's unlikely to add full-time workers even after business improves because, he says, "I've never been more profitable."

The bottom line: Small businesses are figuring out how to increase efficiencies and boost margins without hiring more full-time workers.

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