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Small Businesses Find Tight Job Market Makes it Hard to Hire

Even with the U.S. economy booming and the job market strong, hiring has slowed among one category of employers: Small businesses.

Even with the U.S. economy booming and the job market strong, hiring has slowed among one category of employers: Small businesses.

Yet it isn't because these companies are hurting. Far from it. Small businesses today are generally optimistic, and most say they're enjoying healthy sales.

Rather, smaller companies are being hamstrung by the economy's very strength: Low unemployment has shrunk the pool of job seekers and intensified competition for workers. And smaller companies are in many cases losing out to larger employers, which typically can offer more generous pay and benefits. Some larger businesses are also using their financial muscle to poach employees from smaller companies.

Also contributing to the slowdown in hiring by small businesses is a more discouraging trend: Americans are forming fewer companies. It's a trend that began roughly three decades ago and worsened after the Great Recession. Fewer people could afford to start businesses as the availability of funding, such as borrowing against a home, began drying up. In addition, some industries, like retail and banking, are increasingly dominated by huge chains, thereby discouraging smaller competitors.

Americans started 414,000 companies in 2015, the latest year for which data is available, compared with an average of 524,000 annually in the five years before the recession, according to Census data.

"Small businesses are hit by a double-whammy: (Startup) rates have been low and falling for a long time, so the relative importance of small businesses in hiring has been declining," said Giuseppe Moscarini, an economist at Yale University. "And small firms now are facing poaching rates typical of a healthy market, so they have a hard time retaining employees."

Moscarini's research has found that small businesses — defined as those with fewer than 50 employees — typically hire most aggressively at the end of recessions and early in economic recoveries. That's when plenty of workers are available and generally don't require generous starting salaries. By contrast, larger companies — those with over 500 employees — tend to accelerate hiring later in economic expansions.

"With unemployment low, big businesses tend to poach and attract workers from smaller companies that don't have the financial resources to keep up," said Mark Zandi, chief economist at Moody's Analytics. "All the evidence suggests that small businesses are the principal casualty of the tight job market."

Consider Troy Knutson. He would like to add up to a dozen employees to the 30-person company he founded, Knutech, which installs power generators and backup battery systems. Yet to find the electricians, engineers and technicians he needs, Knutson must compete with huge local companies near his site in Bradenton, Florida. They include defense contractor General Dynamics and engineering company Quanta Services.

As Knutson knows all too well, the bigger firms have longer histories and far stronger financial foundations.

"A lot of employees are really looking for that," he said.

A nearby community college, Manatee Technical Institute, trains the kinds of employees Knutson needs. But the larger companies recruit graduates at on-campus career fairs. Knutson has inquired about participating in the fairs but said he hasn't heard back.

A survey by the National Federation for Independent Business, a small-business trade group, found that 37 percent of small firms had jobs they couldn't fill in July. That's the highest proportion on records dating to 1974.

Many small companies are raising pay to try to keep up, Zandi said. They boosted wages 2.9 percent in June from a year earlier, according to payroll processing firm ADP. (Zandi helps compile ADP's data into employment and earnings reports.) That's nearly twice the increase offered by companies with 500 to 999 employees and roughly equal to the increase that companies with 1,000 or more employees provided.

Still, those pay raises aren't enough to close the overall gap between larger and smaller firms. Research by Nicholas Bloom at Stanford University has found that bigger companies, on average, pay 20 percent more than smaller firms, though the gap has narrowed since the 1980s.

Some economists say the struggles of small businesses in finding enough qualified workers will soon spread to medium-size and bigger companies. James Diffley, an economist at consulting firm IHS Markit, forecasts that nationwide hiring will slow in 2019 as larger companies grapple with a shortage of hires.

One sign of the slowdown: Paychex, a payroll processing firm, tracks hiring by its small business clients through an index, which has declined about 1.5 percent over the past 18 months. It suggests that smaller companies are still adding jobs but at a slower pace. The gap between Paychex's large company hiring index and its small company index is the widest since the firm began tracking the data in 2005.

At the same time, huge multinational companies have been playing a bigger role in hiring since the late 1990s, according to Census data analyzed by Lucas Puente, chief economist at Thumbtack, an online marketplace for small businesses.

The share of workers employed at companies with more than 10,000 employees rose from 24 percent in 1996 to 28 percent in 2015, Puente's analysis found. At the same time, the proportion of workers at companies with 20 or fewer staffers fell from 20 percent to 17 percent.

Zandi noted that smaller companies have less ability to address some challenges all companies face in hiring. Many, for example, are unable — or unwilling — to hire as many immigrants as in the past, Zandi said. Think of landscapers, smaller construction companies or independent hotels. Larger firms, however, have the legal resources to obtain legal work visas for potential employees.

Still, small companies can improve their ability to hire, experts say. They can stress the potential for more rapid advancement and for gaining a wider variety of experience at a smaller firm.

CleanChoice Energy, based in Washington, has found that its mission — to provide homes with renewable energy — helps attract employees. The company hopes to add 15 workers to its 80-person staff. Richard Graves, a co-founder, said the company, which has existed for just five years, has promoted some employees two or three times.

"For younger employees, having the opportunity to invest in your potential is just as important as what you're being paid," Graves said.

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