Despite the tough economy, small businesses were able to add new employees in January.
Based on our analysis of payroll data for more than 20,000 small businesses, we have determined that small businesses remain a lone bright spot on an otherwise dismal economic landscape.
Our SurePayroll Hiring Index rose to 11,306 in January, up from 11,274 at the end of December. This represents a 0.3% increase in the average small business size, meaning that the average small business grew in size in January.
Hiring growth has been flat of late, with the last five months all being in the 0.2% to 0.3% range. We have been expecting hiring declines for several months now, given the economic conditions, but small businesses are not capitulating.
The headlines inform us of growing unemployment across the nation. What they don't note is that most of that unemployment is a result of layoffs at large companies.
Of course, some small businesses are laying off employees, but on average small businesses are still creating more jobs than they are destroying. This is not something that can be said of larger companies.
Small companies are less likely to downsize in general. That's because the value of a small business employee to a small business owner is generally higher than the value of a large business employee to the shareholder. It's also a result of most small businesses tending to hire very conservatively, running lean and mean even in the good times.
Fewer Employees, More Contractors
Our Hiring Index evaluates company size as a combination of W2 employees and 1099 contractors.
Another explanation for the continued resilience of small business hiring in our economic data is that the mix of employees versus contractors is shifting.
In other words, small businesses may still employ the same number of workers but the percentage of employment that is attributable to independent contractors has been increasing.
We track this metric with the SurePayroll Contractor Index, which currently stands at 3.78% as of the end of January 2009. This is the highest level we've seen the Contractor Index since we started distributing our small business economic data.
When we say the Contract Index is 3.78%, that means that for every 100 workers engaged by small businesses in December, 3.78 are 1099 independent contractors and 96.22 are W2 employees.
In other words, one out of every 26 employees that works for a small business does so as an independent contractor. For small business owners, this is an attractive way to engage workers because contractors do not require costly benefits, can be more easily terminated on short notice, and also do not provide any incremental employer payroll tax burden.
Were we to only report the SurePayroll Hiring Index as comprising full-time W2 employees, the small business economy would not seem quite as resilient – but the balancing act between hiring contractors versus employees has always been a useful tool in the arsenal of small business owner techniques to weather a difficult economic storm.
Small Business Startups – Not Happening at the Rate We've Seen in Previous Recessions
We will get to what is happening to small business salaries shortly, but first it seems important to inform you of an inauspicious trend we are seeing in the small business economy.
In prior recessions, small businesses have ended up being net job creators. This is not likely to happen in this recession because fewer companies are being formed.
Reasons that fewer new companies are being formed include an acute dearth of startup capital and fewer new business opportunities to pursue due to a general decline in economic activity. In addition, people are less willing to quit a job to start a business because the job is more precious...if the business fails, the entrepreneur may not be able to go back to work and get a similar job at a similar pay rate. All of these factors, and several others, have made Americans more risk averse and less likely to start a new company than they have been in any other time period in American history.
This trend does not bode well for a fast economic turnaround, given the role that the small business economy typically plays in ending recessions. As such, we must all hope that Obama and company will provide real incentives and help for people starting businesses.
Without that, we will not pull out of this recession as we have in the past when we have turned difficult times around with efforts powered largely by the entrepreneurial spirit of the country.
Small Business Salaries
Small business salaries dropped again in January.
To be precise, our SurePayroll Pay Index was at 1,028 at the end of December and ended January at 1,027. The average small business paycheck in the United States now stands at $31,572. On a percentage basis, small business annualized salaries dropped 0.12% in January.
That's bad news for employees, especially those who are looking for work now. It means jobs are paying less than they used to and, as a result, many consumers will have less money to spend than they did before.
On the other hand, it does help small business owners, who can bring new employees on for less money.
The silver lining for employees is that this is the smallest monthly percentage drop in salaries since May 2008. That's especially heartening in an environment where prospective employees are in such high supply due to growing unemployment. For employers, it is definitely a buyer's market.
Regional and State Performance
The Midwest, Northeast, and South experienced hiring growth in January. The West was the only region that experienced a contraction in hiring in January.
Monthly hiring gains for these regions were 0.6%, 0.8%, 0.4%, and -0.2% respectively. The Northeast led the country in small business growth in January.
In January, average salaries declined in the South by 0.4%. In the Midwest, Northeast and West, however, salaries increased by 0.4%, 0.2%, and 0.3% respectively. Despite the strong showing in a few regions, the national average salary declined due to the weightings of the various regions and their average salary levels.
As depicted in the graphic below, year-to-date results vary from state to state. The Scorecard comprises data from all 50 states but we pay close attention to states that we have earmarked as "benchmark states": Arizona, California, Colorado, Florida, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New York, Oregon, Pennsylvania, Texas, Utah and Washington.
Data for our benchmark states are 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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