Employment growth at small businesses tempered slightly in April, although wage growth continued to show signs of improvement, according to payroll giant Paychex.

The Paychex | IHS Markit Small Business Employment Watch, which Paychex produces in collaboration with research firm IHS, indicated the Small Business Jobs Index fell 0.12 percent in April, down 0.96 over the past year to 99.53. On the other hand, hourly earnings grew $0.70 to $26.56, up 2.69 percent from 2017. The rate of one-month annualized hourly earnings growth in April was 3.25 percent, a two-year high.

“What we’ve seen is a continued moderation of job growth,” said Paychex president and CEO Martin Mucci. “The job growth rate is down about 1 percent from April of last year. We’re still seeing growth, but it’s moderated. With unemployment running for about the sixth month in a row at about 4.1 percent, we would expect that because there’s a continued tight labor market.”

Wage growth appears to be dampening as well. “Year over year, it’s 2.7 percent, so it’s actually declined a little bit from its peak of 2.9, which seems kind of strange given the fact that you have a tight labor market and you would think wages are going up,” said Mucci. “What we’re seeing is some businesses are hiring contingent, part-time workers to fill some of the gaps instead of raising wages. Some have poured investment into automation to try to keep the wages down. If you took April over March, we do see about a 3.25 percent wage increase, so we do think that probably that 2.7 will continue to rise because we’re seeing more minimum wage increases take effect, and probably wage increases just due to some of the difficulty in finding the right employees.”

Paychex IHS Markit Small Business Employment Watch

In terms of regional growth, the South led the way in employment growth, while the West ranked highest on wage growth. Tennessee stayed at the top in in terms of state job growth, Arizona remained in first place in annual hourly earnings growth. Among cities, Denver continued to lead among metropolitan areas in terms of job growth, while Phoenix topped other metro areas on wage growth.

Among industries, manufacturing’s pace of small-business job growth improved nearly 1 percent compared to last year, while the leisure and hospitality sector continued to lead among industry sectors in terms of hourly earnings growth.

“One of the interesting things is that in the South we’re seeing manufacturing increase,” said Mucci. “Small businesses in some large industries are doing better in the South, particularly in manufacturing. Boeing is there. A lot of auto manufacturers are there, and there are jobs available. The manufacturers have moved there, and now manufacturing was the only sector to increase its growth rate year over year. In the South it’s up around 3 percent, although overall it’s up less than 1 percent. But it is interesting that manufacturing is picking back up, while some of the others, like leisure and hospitality, have been decreasing their growth rate.”

On the flip side, financial activities had its lowest month in more than 10 years in terms of employment growth, decreasing 0.71 percent and becoming the slowest-growing industry sector. In terms of hourly earnings growth, the professional and business services sector was the slowest at 2.28 percent.


Lessons for accountants

Accountants can help their small business clients by helping them cope with the new tax law, along with other issues such as minimum wage increases in some cities and states.

“With tax reform, watch to see if they’re continuing to withhold the correct amounts from their employees, and are they planning tax changes for themselves as a small business,” said Mucci.

He also advises accountants to keep an eye out for pay equity laws that are being proposed or enacted in some places such as Massachusetts, where it takes effect in July. “There are a lot of pay equity bills that are starting to flood the state legislatures, looking for pay transparency and equity between genders,” said Mucci. “It might be a good thing for accountants to be aware of for their clients, to possibly do some studies ahead of time to see if there are any gender pay issues because of legislation coming out making it unlawful to pay differently based on gender or other protected class reasons.”

Tariffs could also have an impact on small businesses if the Trump administration decides to impose them on imported goods such as aluminum and steel from some countries.

“The tariffs will have an impact specifically on niche businesses if they have supply chains where they’re getting, for example, aluminum or steel from other countries, or if they’re producing something that’s being tariffed,” said Mucci. “We haven’t seen a lot of that impact on small businesses yet, but I’m sure it will, depending on that niche. Small-business optimism is still very high, but I think their biggest concern is still around the recruiting and hiring of workers in a tight labor market.”

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