Labor pains

Entrepreneur, April, 1998 by Mark Henricks

David Ferris got 100 responses to the classified ad he placed for a research analyst. "But only one was a possible candidate, and even that didn't work out," laments the owner of the seven-employee Ferris Research, a research analysis firm in San Francisco.

When he needed a new press operator, Arden Gustafson called several fellow Minuteman Press franchisees to ask if they'd seen any good candidates. "Good luck," the Gresham, Oregon, franchisee was told. "We haven't had anybody come through."

And in Wichita, Kansas, Wichita Tool Co. owner Bill Pritchard has seen his work force shrink from 43 to 21 in two years, solely for lack of skilled people. "In 32 years of business," says the plastic injection mold maker, "it's the worst I've ever seen."

It's a labor shortage crippling small businesses across the count, as entrepreneurs find they can't hire the people they need to maintain more than just minimal levels of production and service. And the numbers confirm: It's as bad as most entrepreneurs have ever seen.

The 1997 unemployment rate of 4.9 percent was the lowest measured by the Bureau of Labor Statistics since 1973. The latest quarterly small-business survey conducted by Coopers & Lybrand LLP last June found a shortage of capable workers had become the number-one problem cited by small-business owners, displacing taxes, government regulation and slack demand.

Meanwhile, the nationwide demand for new employees measured by Manpower Inc. for 1998's first quarter was the strongest the Milwaukee temporary staffing firm has ever experienced. "It's about the tightest it's been in 25 years," confirms Gretchen Kreske, Manpower's manager of strategic information, "especially in the high-tech area."

Some 190,000 high-tech jobs will go unfilled this year, according to the Information Technology Association of America (ITAA). But technology isn't the only industry hurting. The Federal Reserve Bank's latest report, released in January, found skilled construction workers and technicians were also in short supply.

Even entry-level workers are scarce. "It's at both ends of the skill range," says Gordon Bingham, senior vice president of marketing for Olsten Corp., a Melville, New York, temporary staffing services firm. "Companies continue to be challenged to find blue-collar workers and low-level retail clerks."

And the problem has little regional variation. The Federal Reserve report says labor markets are "fight or very tight" in all 12 federal districts, with labor supplies shrinking in the Midwest, South and much of the West. Manpower's survey concludes "patterns of hiring intentions remain uniformly strong in all geographic regions."

The main cause is obvious: It's the economy. Business has been good for the better part of the decade, and firms are snapping up qualified employees faster than ever. Nearly a quarter of the firms Manpower polled planned to increase hiring in 1998's first quarter. Cooper & Lybrand's survey found that three-quarters expected to hire this year, while only 3 percent projected layoffs.

The strong economy is creating a drain on workers in another way: More employees, encouraged by their entrepreneurial owners' success, are taking the plunge into self-employment. Gustafson's last press operator left to start a business inspecting underground fuel tanks. "There's a lot of opportunity out there, and I applaud that," says Gustafson. "But I'm in the middle of it right now."

EYE OF THE STORM

The middle of a labor shortage is a bad place for small businesses to be. "Small businesses in particular are impacted by the lack of entry-level people," says Bingham. Service and technology, two areas heavily populated by small companies, are among the hardest hit in the shortage.

Worker shortages hurt in many ways. Companies may unintentionally push customers away as the shortage affects productivity, forcing them to raise prices and reduce services.

"Some companies are actually holding back sales," says Bill Fioretti, director of the University of Cincinnati's Small Business Development Center. "They have customers lined up. They just can't fill the orders."

While things haven't gotten that bad for Ferris, his company has been hurt. "We're unable to bring out new product and service offerings because we don't have the staff," he says. "We don't actually turn down business, but we also don't bring out new things we know we can sell."

Coupled with the inability to boost production - and thus sales - is the demand by employees for higher pay. "You're going to have to pay higher wages to get people to work for you," says Bob Barbato, director of the Small Business Institute at Rochester Institute of Technology in New York.

Labor costs are indeed going up. The University of Texas, Austin, reported average starting salaries for computer science graduates last December were up more than 9 percent from a year earlier, to $44,800.

It's occurring in other industries as well - and affecting more than starting salaries. A third of the financial officers polled by Menlo Park, California-based temporary services firm Accountemps said they increased employee pay to attract quality employees.