Growth stunt: rising costs have put a damper on small-business hiring

Entrepreneur, June, 2005 by Mark Henricks

"THE ECONOMY certainly is not overheating in the small-business world," says Michael Alter, president of payroll service firm SurePayroll. The Skokie, Illinois, company's latest quarterly report on small-business payrolls, released in April, suggests Alter may be understating the hiring chill that's currently gripping entrepreneurs.

Year-to-date growth in the SurePayroll Hiring Index, which measures changes in small-business size, is less than one-half of one-tenth of a percentage point. Alter says the rising costs of capital and fuel have made small employers cautious. Interest rates are double what they were one year ago, he notes, and fuel costs have skyrocketed, while business owners' ability to raise prices is limited. "Your prices are fixed, your costs are all going up--it's hard to hire people and grow," he says.

Some key findings of the SurePayroll Pay Index, which measures changes in average paycheck size, include falling salaries and a sharp increase in the use of contract employees. Year to date, independent contractor use has grown by 2.2 percent, indicating small businesses are becoming less reliant on full-time employees. Wages, on the other hand, have fallen an average of 1 percent nationwide. The sharpest declines were in the West, while wages rose in the Midwest and the South.

Falling wages could be bad news for the economy in the long term. "If you continue a 1 percent decline, that's a big annual change," Alter notes. "Consumer confidence should decline if that continues."

But Alter doesn't expect a crisis soon. "My bet is we're going to be on this plateau for a few quarters," he says. "I don't think there's anything on the horizon sending us one way or another."