The rate of job growth and wage increases at small businesses dropped in June, according to payroll giant Paychex.

The monthly Paychex | IHS Markit Small Business Employment Watch, which Paychex compiles with the research firm IHS Markit, found the Small Business Job Index decreased 0.20 percent in June to 99.40, after a slight increase in May. Year over year, there was a 0.69 percent dip in the index. On the wage front, the pace of wage growth fell to 2.47 percent in June, the first time wage growth has been below 2.50 percent since early 2016. Weekly earnings growth also slipped slightly to 2.73 percent, while the number of weekly hours worked increased 0.20 percent year-over-year.

“The June ’18 employment report showed a drop-off from May in both the rate of hiring as well as the wage increase year over year,” said Paychex president and CEO Martin Mucci. “We saw for the first time that the annual wage increase dropped below 2.5 percent, which is pretty surprising given the tight labor market. That seems to be the big question out there. Small businesses have a little bit of a harder time hiring workers in a tight labor market so you’d expect that to be going up.”

Paychex recently conducted a survey in which the company asked small-business employers whether they were going to give a wage increase to their workers. It found 65 percent replied that they were not because they didn’t have enough profits to increase wages, and another 30 percent said they were making other investments in their business, such as capital investments. “We’d expect that the wages will have to go up at some point, but at least at this point a number of small businesses didn’t think they could do it,” said Mucci.

The tax reform law that Congress passed last December may be having some positive impact on corporate hiring with the steep reduction in tax rates, but not as much among small businesses.

“We’re still seeing moderate job growth, so that’s still positive, and businesses still seem to have a very high level of optimism, but we’re not seeing it necessarily in wages yet,” said Mucci. “What we did find in that survey was that they were investing in their business where they could, but wages have not been the priority at this point. I would assume as small businesses, like any other, need to find exact talent, they may have to increase certain wages for specific positions.”

Paychex found small business owners indicated they’re also investing in automation and more benefits to attract employees, while bringing in more part-time employees and contingent workers to try to keep wages at a lower level since they’re not making as much profit as they had hoped. “I do think there are many small businesses that do get a benefit from tax reform, and that will continue, but it just doesn’t seem to be impacting wages yet,” said Mucci.

In terms of regional, state and local trends, the South remained the top region for employment growth in June, while the West ranks highest for wage growth. Tennessee ranked in first place on state job growth, while Arizona remained in first place on annual hourly earnings growth. Denver continued to lead among metropolitan areas in terms of job growth, while Phoenix stayed in first place on wage growth for metro areas.

In terms of industries, the financial activities sector was the only industry to show an increase in job growth in June. Hourly earnings growth for the leisure and hospitality industry outpaced the other industry sectors, at 3.93 percent.


Paychex Small Business Wage Growth

“All regions moderated the level of hiring,” said Mucci. “The South is still number one. We’re seeing better manufacturing job growth there, but it was at a low point. We’re also seeing construction is down, but it’s still at a fairly high level of job growth. In the South, particularly the Florida Panhandle, they’re still recovering from the storms of last fall, so you’re seeing roof repairs, landscaping and other kinds of jobs that are keeping construction up. On the West Coast, they’re not seeing as much job growth, but they’re seeing a number of minimum-wage increases go into effect. In Texas, it’s kind of a Tale of Two Cities. Houston has shown growth as oil prices have come back a little bit, but Dallas has seen the worst change year over year, down 2.7 percent.”

Accountants should keep their small business clients informed about the latest changes, such as the recent Supreme Court decision in the Wayfair case upholding states’ ability to require online merchants to collect sales tax from out-of-state customers.

“While that doesn’t directly impact jobs, I think that accountants could be helping small businesses decide what the requirements are by their state to collect sales taxes if they do business across state lines and they’re an online provider,” said Mucci. “That certainly will keep accountants busy. And then of course there’s a new draft of the 2019 Form W-4 and its instructions. It’s out for comment now and I would think that a number of small businesses that are hiring will be impacted by this over time. The IRS is accepting a lot of public comments from the accounting community on that.”

From an HR standpoint, Mucci is seeing a number of accountants advise their small business clients about sexual harassment policies, making sure they have a harassment policy that is adhered to by the business and its employees. “It’s part of the current trend right now,” he said. “While accountants might not deal with it directly, they are such a trusted advisor that they’re advising their clients to go to HR support for those kinds of things.”

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