Why are small businesses hiring fewer people? It’s complicated | US small businesses

Small businesses are employing fewer people. It’s a worrying trend given that in the US small businesses employ nearly half (46.4%) of private sector employees.

The numbers speak for themselves. According to data from software maker Intuit, employment at US small businesses with one to nine employees decreased by 23,400 in February compared with January, with all of the 12 industrial sectors and regions tracked also reporting declines. The payroll provider Paychex says that once fast-growing sectors such as leisure and hospitality have also seen wage declines, with job growth in the western part of the country falling into negative territory for the first time since 2021.

The National Federation of Independent Businesses (NFIB) says that small business owners’ plans to fill open positions fell to the lowest level since May 2020. Job openings are down 28% from their peak in March 2022.

But why? Like all answers to complicated questions, it’s never just one thing.

As the NFIB reports, inflation is certainly having an impact. The overall rate of inflation has cooled but the costs of the core materials my clients are paying for – which include iron and steel, concrete, freight, utilities, manufacturing – are up anywhere from 25% to 35% over the past three years. Many of these firms are still grappling with how to pay these much higher expenses and are being forced to keep their payrolls lean in order to make up the difference.

Interest rates are also restraining growth and hiring. The prime rate is about 8.5%, which means that most small companies are paying anywhere from 9.5% to 11.5% for new financing – if they can get it – and many of my clients are holding back on their hiring needs due to the debt maintenance challenges involved.

For those who are still looking to hire, they can snap up some of the tens of thousands of corporate employees that have been laid off over the past year when possible and affordable. But others are leaning more into tech and an increasing number are flirting with AI to get more things done in the office with fewer people.

Demand expectations have also dropped. The post-Covid catch-up in retail, restaurants, travel and services has slowed back to normal levels. Wars, commodity price volatility and shipping headaches continue to be a problem. The rush to buy and store inventory in response to supply chain problems is now over. The “great migration” of the Covid era has mostly tempered resulting in lower turnover. Many of my clients who were thinking of hiring employees to meet spiking demand back in 2022 are now tempering these predictions back to reality.

All of these are certainly factors. But could it be something else? Has the desire for actual employees reached a tipping point? I think we’re nearing that too.

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“I do everything I can to avoid hiring another employee,” one client told me recently. “It’s just becoming too costly.”

Costly doesn’t just mean compensation, which has risen overall a whopping 15% over the past three years. It’s healthcare costs, which rose on average about 7% this year. Or minimum wages, which went up in half the states nationwide.

And it’s regulatory costs. Over the past few years employers of all sizes have been faced with new regulations.

It’s true that every company’s most important asset is its people. But like all assets, businesses must realize an acceptable return on investment. Unfortunately, as costs and regulatory burdens have increased, that ROI has decreased. To me, it seems like many of my small business clients are doing what smart business people do: they’re evaluating where best to make their investments when compared with all the other options they have. Right now, hiring seems to be a less attractive option.