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Is There Really A Slump In Small Business Hiring?

Written by Ken Gaebler
Published: 6/21/2016

Small business job growth appears to be stalling out during the first half of 2016. What's causing the slowdown in hiring? More importantly, what does it mean for your small business?

A year ago, the small business sector was riding high and driving robust employment growth.

Hiring Slump in Small Business Economy

What a difference a year can make. Some are now suggesting that small business hiring is in a slump.

In June 2015, the Wall Street Journal reported on the ADP Small Business Report with a headline indicating that the U.S. economy added 237,000 new jobs. More than half of those positions, the article noted -- 120,000 jobs to be precise -- were created at companies with fewer than 50 employees, positioning small companies at the center of the nation's hiring bonanza.

Fast forward to today and ADP's most recent employment figures show that small businesses added just 93,000 jobs in April and 76,000 jobs in May. Based on the April and May data, as compared to June 2015 data, some are saying that small business hiring is slowing down.

The story gets even worse when you realize that ADP recently revised all of its 2015 jobs numbers, and they now say 307,000 jobs were created in June 2015, and, of those, 152,000 were created by small businesses.

So, get this. We've gone from 152,000 small business jobs created in June 2016 to exactly half that -- 76,000 new small business jobs -- in May 2015.

It seems as if the sky is falling regarding small business hiring, doesn't it?

Personally, I take the ADP numbers with a few silos full of salt. I co-created the first payroll company employment report (which ADP totally copied, I don't mind saying) and so I know how hard it is to use those numbers to determine what's really going on in the economy.

If you're looking at a small business that grows from 8 people to 55 people in one month, for example, you might think that one impressive small business with fewer than 50 employees just created 47 new jobs. But you'd be mistaken. With 55 employees, the business is recategorized to no longer be a small business with fewer than 50 employees and its contribution to the 1-to-49-employees small business category is not counted. See how messy things can get?

One thing I've learned is that you always need to look at year-to-date numbers and should never look too closely at any given month and the month-to-month changes. Trailing-12-months data is even better because it gets rid of seasonality.

If we look at ADP's year-to-date (YTD) numbers for May 2016 versus May 2015, we see that ADP says small businesses created 535,000 jobs for May 2015 YTD and only 418,000 jobs for May 2016 YTD.

So, based on these YTD numbers, OK, yeah, it does appear that small business hiring is slowing down.

But the thing about small businesses is that they are small. They simply can't absorb tons and tons of new jobs.

Yes, they hired more people in 2015 because the economy was really picking up. But a 20-person company that hires 5 people in one year is not likely to do the same thing the next year. A growth rate of 25% is very hard to keep going. The next year the company might only hire 3 people.

If that one company were the whole economy, you might say "Oh no. Hiring is down 40%."

But think about it. Over two years, that company went from 20 people to 28 people. That's 40% positive growth in two years. That's phenomenal. Now are you ready to turn that economic frown upside down?

How small business hiring trends get reported by the alarmists

Still, the pessimists are reading the data as bad news.

"For the first four months of 2016 job creation has been stagnant," said NFIB Chief Economist William Dunkelberg. "Month after month we see no strong direction in our jobs report."

There doesn't seem to any single cause for the slowdown in small business hiring, the experts say.

Instead, they tell the journalists that a combination of several factors is leading many owners to either voluntarily or involuntarily put the brakes on their hiring agendas:

  • Shortage of Qualified Applicants - Small business owners across the nation continue to cite a shortage of qualified applicants as a serious hiring challenge. NFIB statistics showed that 29 percent of owners had job openings they could not fill in April. "This month hiring activities increased, but apparently applicants are not qualified for the open positions," said Dunkelberg.
  • Political Uncertainty - The small business economy isn't immune to the effects of the uncertainty that has characterized the U.S. presidential election cycle so far. In a survey conducted by Capital One, a quarter of small business owners said that the upcoming presidential election is their number one concern for 2016. From legislative inaction to tax rates, there are multiple issues that are keeping owners awake at night and causing them to delay hiring plans until the political waters become more settled.
  • Minimum Wage Laws - Some small business owners are hesitant to hire lower income workers due to minimum wage legislation. In certain states, hiring a worker at approximately $9 per hour now could translate into a legally required wage of $15 per hour in three years -- a wage hike that many think will be difficult to sustain over the long term.

While there may be some truth to these assertions, I will stand by my contrarian guns in saying that life has been very good for small business owners of late, and the sky is by no means falling.

Don't fall prey to simplistic and often erroneous reporting of questionable economic data.

Hiring tips for small business owners

The one thing I do agree with the so-called experts on is that it's getting harder to find good talent. In the big hiring boom last year, we grabbed all the best ones. Now, the good ones are hard to find.

As you're looking for new hires, it's important to remember that a new employee is an investment in your company's future. So, like any investment, hiring needs to be strategically aligned with your organization's needs and goals.

There's a big difference between finding employees and finding good employees.

Don't compromise your hiring standards.

In a tight job market (like the one we're in now), it's important to define the requirements for open positions and continue your search until you identify applicants who are truly qualified to do the job. A "good enough" hire now could come back to bite you later.

Likewise, it's important to understand the true impact that elections and other current events may have on your company. In many cases, anxiety about politics and future policies can cause owners to scrap or delay sound business decisions.

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