Small biz job growth down in August, while wages stabilized: Paychex

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Job growth at small businesses fell slightly in August, according to payroll giant Paychex, but wages showed encouraging signs.

The Paychex | IHS Markit Small Business Employment Watch report indicated job growth declined 0.17 percent in August, and 0.76 percent over the past quarter, contributing to a 1.22 percent year-over-year drop in the rate of small business job growth.

“It’s down about 1 percent from last August,” said Paychex president and CEO Martin Mucci. “There’s still job growth, but it continues to be a difficult environment for small businesses to hire when we still have 3.7 percent unemployment. That’s the biggest issue. Jobless claims are still very low. Consumer confidence has declined a little bit, although business optimism has increased. I think it’s more reflective of the small business challenge to find and hire talent than anything else right now.”

Hourly earnings growth was 2.61 percent ($0.69) in August, and weekly hours worked indicated positive growth for the first time this year, according to Paychex.

“We did have some weekly hours growth for the first time in 2019, about 2 percent annualized, so it looks like wages are coming up a little bit,” said Mucci. “They’re still lower for larger businesses. I think we see larger businesses over 3 or closer to 3 percent. The average for smaller businesses under 50 [employees] is about 2.6 percent, but sometimes the smaller businesses under 10 employees and owner-only businesses don’t do too much on wage increases or are not able to do too much. But we do see weekly hours grow, so that’s positive. People are working more hours and still seeing a wage increase somewhere between 2.5 and 3 percent.”

The South remained in the top spot among regions in terms of employment growth in August, while the West led the way among regions on hourly earnings growth.

“Across the board, all regions are down, but the South continues to be the strongest from a jobs index perspective, and the West from a wage perspective because of more minimum wage increases,” said Mucci. “It’s interesting to note that the average minimum wage in the West is around $11.50, and the average minimum wage in the South is around $8, so there’s quite a difference there that may highlight why there’s more job growth right now in the South, and with minimum wages on the lower end, that’s producing some jobs in the West. You’re getting higher wages, but not as much job growth.”

Tennessee took the top spot as the state with the most small business job growth in August, while Illinois remained the top state in terms of wage growth. In terms of metropolitan areas, Dallas was again the top city for job growth, while San Diego maintained its lead among metro areas on wage growth. On an industry basis, the leisure and hospitality sector led the way among industries in terms of hourly earnings growth.

“The strongest states continue to be Tennessee, Texas and Arizona,” said Mucci. “Dallas is the number one city. It’s been the top city for about the tenth month in a row, and up just under 2 percent from a job growth perspective. And Phoenix is doing very well, so we’re seeing good growth there.”

However, there are some headwinds facing businesses both large and small, including the trade wars and tariff increases. Paychex recently conducted a survey that found approximately three-quarters of small businesses would not be affected by the tariffs, but around one-quarter would be.

“About a quarter of our clients would be impacted,” said Mucci. “Some of the surveys are finding that it would be more difficult for them to switch their supplier if they get supplies from China or be able to raise their prices. They don’t have as much leverage as a large business to say they’re going to move their supplier to South Korea or somewhere else. The ones that are impacted, which look like about a quarter of small businesses, may have a little bit more difficult time adjusting either their price or their supplier.”

To help their small business clients, accountants can help them adjust to the changes in the economy and new tax policies.

“The good thing about accounting practices is that they have a wide range of clients and they might be able to bring them additional ideas that they see from other clients,” said Mucci. “Depending on what the businesses are, if they’re related, maybe bring some of them together to give them new ideas for how to handle the supply chain issues.”

Accountants should also advise clients to be aware of the new payroll withholding forms and estimators that the IRS has been developing in conjunction with the changes under the Tax Cuts and Jobs Act. “The new federal income tax withholding, the latest draft of the new W-4 and the new tax withholding estimator are out,” said Mucci. “They can advise their clients to start looking at the new tax withholding estimator to make sure they’re withholding the right amount of dollars out of their pay.”

The IRS has also reportedly hired a number of new staff members for payroll tax compliance. “They feel they’re going to really step up enforcement of payroll tax compliance,” said Mucci. “Always advise clients to be sure that they’re staying up to date, and if they’re with a third party [payroll service], be sure that things are being handled.”

He also noted that a new overtime rule is likely to come out in the fall from the federal government, pertaining to what types of workers and managers are eligible for overtime pay. “I’m sure that’s another thing that accountants are keeping a close eye on for their clients,” said Mucci. “The latest we’ve seen is they are expanding [overtime eligibility], but nowhere near what the original proposed change was a few years ago under the Obama administration.”

President Trump proposed a payroll tax cut in recent weeks, but has also backed away from the proposal. “It is getting closer to the election,” said Mucci. “You may see something there. But I think we should all stay tuned. It looks like things can happen quite quickly. That has been a way to encourage spending, and we did see consumer sentiment dip a little bit in August, but overall I think the consumer confidence numbers are still pretty good. Who knows? If that drops a little bit more, a payroll tax cut may be something the administration would consider doing to encourage spending, particularly around the holidays if the tariffs start raising prices a little bit.”

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