Small businesses are still hungry to hire, but many workers eye better pay elsewhere

Small and midsize firms remain eager to expand their workforces, but economists say many jobseekers are likely chasing higher pay at larger companies with deeper coffers.

The U.S. economy added 303,000 jobs last month, far more than anticipated, the Bureau of Labor Statistics reported Friday. That blowout report came days after private payroll processor ADP likewise found more March jobs gains than expected. But the race to staff up may be a tough one for many small employers right now.

“The challenge, especially for the smallest businesses, is that this is a competitive labor market still,” ADP Chief Economist Nela Richardson said during a conference call Wednesday.

While 2024 kicked off with a spate of high-profile layoffs and it’s taking longer for many jobseekers to land gigs, persistently strong labor demand means that for many employers, “it’s easier to hire, but it’s not easy to hire,” Richardson said.

While a separate BLS report found Tuesday that employers with fewer than 1,000 workers posted the lion’s share of job openings in February, filling those positions is a different matter. ADP said that smaller companies — those with workforces ranging from 20 to 49 — shed 11,000 roles last month, the only subset of employers to do so.

The ability to offer competitive pay may be a factor. Average hourly earnings were up 4.1% in March from the year before, the BLS said Friday. That pace still outruns inflation, which clocked in at 3.2% in February, but has been cooling down for months.

Not all small businesses are scaling back hiring; the tiniest, with 19 or fewer workers, added 27,000 positions last month, ADP found. But Richardson speculated that the drop in some smaller businesses’ hiring could reflect jobseekers following the dollars in an economy where big raises may not be as easy to come by everywhere.

“Workers maybe shifted to larger firms where they could potentially make more money,” she said.

ADP found private-sector workers are still netting healthy average raises. Those who changed jobs from February to March saw their wages jump 10% since the same period last year, while those who stayed put got paid 5.1% more.

The steepest pay gains last month, though, were among firms with 20 to 499 employees. That could indicate many small and midsize companies are pushing to lure hires in a tight market — and possibly trying to close the gap with bigger rivals.

Small businesses have played an outsize role in the increase in job vacancies over the last three years, Tuan Nguyen, U.S. economist at financial services firm RSM, said Thursday. Many, however, are “constrained by their limited resources” and still “face prolonged challenges in recruiting qualified candidates,” he said.

They’ve been competing for talent amid a post-pandemic startup boom that has helped juice the broader demand for labor, contributing to shortages in some sectors that still haven’t been erased. New business formations in 2023 averaged nearly 500,000 each month, a sharp jump from the 300,000 monthly average just four years prior, Nguyen said.

A climate of high interest rates “further exacerbates the challenges for small businesses,” which often face higher borrowing costs than larger companies, he added.

Federal Reserve Chairman Jerome Powell reiterated Wednesday that the central bank likely remains on track to lower interest rates “at some point this year,” an expectation Wall Street investors widely share. But Powell emphasized, as he has for months, that he’d need to see more evidence of inflation trending down toward the Fed’s 2% target.

“Federal Reserve officials can remain confident that they’re satisfying the maximum employment component of their dual mandate,” Bankrate Senior Economic Analyst Mark Hamrick said in a statement after Friday’s jobs report, referring to the central bank’s two-part mission of keeping prices stable and employment high.

With unemployment ticking down slightly to 3.8%, hiring accelerating and wage gains cooling, many analysts remain optimistic that the economy can continue growing without inflation flaring back up.

“The economy continues to display remarkable resilience,” Hamrick said.