SurePayroll's Small Business Scorecard Review
Here's what's happened in the small business economy this past month, based on payroll data for our over 15,000 small business customers:
Small business hiring was down in November, marking a third consecutive month of decreased hiring.
The Scorecard hiring index ended the month of November at 10,466 nationwide. That's a 0.04% decrease from where we were at the end of October, indicating a moderate decline in small business hiring last month.
Given the long run of hiring growth that we saw prior to September 2005, it's noteworthy that we've had three down months in a row. It appears that small business hiring may have reached an inflection point in September 2005.
Interestingly, small business salaries are trending in the opposite direction. The SurePayroll Pay Index clocked in at 940 at the end of November, up three points from October, or 0.3%. The average small business salary across the nation now stands at an annualized rate of $28,888.
We've now had increases in small business salaries in five of the last six months, including November. Salaries are rebounding after a dreadful decline. In the past twenty months, including November, we've had only five up months. All of those up months took place within the last six months. For fifteen of the last twenty months, small business workers saw salaries dropping. Based on this data, it appears that small business pay levels may have reached an inflection point in June 2005.
With myriad negative economic factors making life difficult for small businesses, having to pay higher salaries may be the straw that breaks the camel's back. Inflationary trends in salary make it harder for small businesses to grow, so it's no big surprise that small business hiring has slowed in recent months.
Paying More for Higher Quality Workers
Why are salaries rising? The many hiring increases in the last twenty months have finally put some upward
pressure on small business salaries. It's starting to get tougher to find good people, and small business
owners are having to up the ante with higher salaries — even though the pace of hiring is slowing down.
When it comes to hiring, small businesses are emphasizing quality over quantity. If one worker is 50% more productive than a co-worker, it might make sense to pay them 50% more than the other worker. If you can pay them 30% more than the less productive worker, you're ahead of the game. You may as well fire the low-productivity employees and replace them with more expensive, higher-productivity employees. In our data, that shows up as salary inflation — bigger average paychecks per employee.
Over time, salary dollars will migrate to high-productivity workers and we'll likely see small businesses continue to be in a "do more with less" mode. That may imply smaller staffs at each small business, but they may be more highly compensated on average than in the past and, despite lower numbers, they will still have to get all the work done.
As the nation struggles to emerge from an economic slump, the trends we are witnessing make sense. We've seen small businesses cautiously hiring for some time now. They've had a chance to see new employees in action. The good ones are getting pay increases and the bad ones are being let go. Based on our discussions with small business owners, probationary hiring is much more common these days. When it comes to hiring, small businesses are adopting a "try before you buy" approach. We see this in our payroll data. Small business are frequently — in increasing numbers — engaging workers as independent contractors first, putting them through the paces, and then upgrading them to full employment later. Alternatively, they are hiring employees at low salary levels and promising quick raises if things work out. This trend contributes to the current dynamic in the small business economy: higher salaries, lower hiring.
With salary deflation dampening, the hiring index will be the key index to watch in the months to come. If we see decent recoveries in hiring over the next six months, we'll be in the midst of a healthy recovery. If hiring continues to fall, it suggests that we may have to endure some economic pain for longer than most might hope. That pain will be a result of salary inflation being added as a newcomer to a long list of negative economic factors that challenge small business owners.
Year-to-Date Results
The year is almost over. So, how has the small business economy fared in 2005?
For 2005, our year-to-date growth number for small business hiring is 0.29%. That tracks to an annual growth in small business hiring of just over 0.32% for 2005. Growth couldn't be much more anemic than that. In 2004, we saw national small business hiring increase by 4.4%. The small business economy has been in slow motion throughout 2005. We didn't just stand in place, but we didn't move much faster than that either.
Year-to-date, small business salaries have dropped 1.27%. That translates to a projected annualized decrease in salaries of 1.39% for 2005. While that might sound like bad news, it's actually good news because earlier in the year we were tracking on much steeper declines for 2005. This suggests that the threat of prolonged salary deflation is dwindling, which is great news for the economy.
To put 2005's salary decline in context, it's worth noting that in 2004 the average check size dropped by 4.8%. Note also that salary declines are a mixed blessing. Lower salaries are good news for small business owners but are bad news for workers whose fortunes ultimately affect small business owner fortunes — if salaries drop too much, employees stop spending and that lowers consumer spending which ultimately can adversely affect small business revenues.
Independent Contractors
As of the end of November, the SurePayroll Contractor Index stands at 3.29%. That means that for every
100 workers engaged by small business, 3.29 are 1099 independent contractors and 96.71 are W2 employees.
It's been hovering close to that range consistently for the last six months. Despite the recent flatness
in our contractor metric, the use of contractors is generally on the rise relative to prior months.
At the end of 2004, the metric clocked in at 3.20%.
Regional and State Performance
On a regional basis, the hiring story has been the same for the past four months. Small business size
is down year to date in every region except the Northeast. Small business size in the Northeast, measured
by the number of employees, is up 10.2% year to date and has recorded sixteen straight months of
increased hiring.
On the salary front, the South and the Midwest remain in positive territory with year to date increases in average paycheck size. Salaries remain down year to date in the Northeast and the West.
As depicted in the graphic below, results varied from state to state. The Scorecard comprises data from all fifty states but we pay close attention to 21 states that we have earmarked as "benchmark states:" Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia, and Washington.
Year-to-date, salaries are up in 15 of our 21 benchmark states. Year-to-date, firms have increased in size in 11 of our 21 benchmark states.
Data for our benchmark states is available — just send me an email and let me know if you want the data for your state.
I welcome any and all questions or suggestions regarding our Small Business Scorecard initiative. Feel free to contact me at malter@surepayroll.com or by phone at (847) 676-8420 ext. 7229.
Best regards,
Michael Alter
President
SurePayroll, Inc.
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