Although some businesses may be small, their role in the U.S. economy is huge. Small businesses — those employing fewer than 500 people — account for 99.7 percent of employer firms and give jobs to about half of the people working in the private sector. And they have been a traditionally reliable job-creating engine for the economy, responsible for an amazing 64 percent of net new jobs, according to the Bureau of Labor Statistics.
But can that continue?
Some strong headwinds are confronting small business job growth. These are macroeconomic issues that owners can do little to solve, but likely are seeing the impact in their businesses. All are related to people and all point to an American labor market that isn’t as healthy as we like to think.
The first is a shortage of qualified labor. In its January Beige Book, the Federal Reserve reported that the labor market tightness continues in the district covering Texas, and stated that most districts nationwide reported continued challenges finding workers across a range of skills and sectors and it was beginning to constrain growth. For several years, hiring managers have been struggling to fill tech jobs with people who have the requisite skills – a shortage that could definitely limit growth.
It doesn’t help that fewer people are working, which is the second issue. While a low unemployment rate is a good thing, a low labor participation rate is not. The former shows the percentage of Americans looking for work, while the latter indicates how many are available to work. Despite an upturn in February, the labor participation rate has declined from 66 percent to about 63 percent over the past 10 years as more than 16 million have opted out of the labor force.
It’s troubling that 25-to-54-year-olds, those in their peak working years, have seen their participation in the labor force gradually decrease since 2000, according to the Bureau of Labor Statistics.
Productivity is at the heart of the third issue, as the U.S. productivity rate continues to lag. This is concerning because improving productivity is a prime mover of higher standards of living. The Labor Department reports that productivity (goods and services produced per hour worked) has grown for seven years, but below its long-term average. In 2017, business sector productivity was up 1.2 percent over 2016, which equaled the average rate from 2007 through 2017, but is well below the average 2.1 percent rate recorded since 1947.
With productivity stagnant, firms will most likely have to add employees (if they can find them) and pay current staff more. That puts the onus on managers to get workers to produce more.
An option for business owners to spur growth is to upgrade equipment or automate. While this doesn’t replace the need to attract the right talent, it can improve productivity and efficiency. There is a tailwind that will help some small businesses do this – the tax overhaul. However, it may not be the windfall that all small businesses wanted, as many won’t qualify for reductions. For the next five years, the new code allows companies to immediately deduct the entire cost of new equipment from their taxable income, effectively giving them a price break. The previous rule allowed companies to write off only a portion of the cost each year.
What’s a small business owner to do?
Owners should recognize and reward workers critical to the success of their business, particularly at a time when competition for talent is getting hotter.
To combat a shrinking labor force, owners will have to identify, train and retain young workers. Internships and summer programs are options.
To keep employees, focus on the culture that makes small businesses unique. Whether it’s a family-owned business or a family-like environment, small business offers qualities that big business can’t or won’t. Millennials are looking for cultures that give them opportunities to learn, work from home and more.
Tap into under-utilized talent pools. Here, small businesses can learn from their big brethren. A group of large companies formed the Autism at Work program to recruit those with the condition by making certain accommodations, such as eliminating the traditional job interview that relies on strong social skills.
It’s important that small business owners determine solid labor strategies now in order to help their success in the future.
James Thompson is the CEO and president of The InSource Group, a technology staffing and placement company with offices in Dallas and Fort Worth. He can be reached at JT@insourcegroup.com.