Small business job growth slipped in June, but wage growth continued, says Paychex

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Small business job growth declined 1.09 percent year-over-year in June, but hourly earnings growth rose for the third consecutive month, according to payroll giant Paychex.

The Paychex | IHS Markit Small Business Employment Watch for June, which Paychex compiles each month with the research firm IHS Markit, showed signs of a tightening labor market. The national jobs index dipped 0.45 percent from May to 98.32 in June. However, with a three-month annualized growth rate at close to 3 percent, hourly earnings growth during the second quarter was the strongest since 2017. Hourly earnings growth increased to 2.65 percent ($0.70) in June, although weekly earnings growth slid to 2.02 percent because of a continuing decline in the number of hours worked compared to a year ago.

“The June 2019 Small Business Jobs Index did drop after holding pretty steady for the last five months,” said Paychex president and CEO Martin Mucci. “Now, one month doesn’t make a trend, so we’ll keep an eye on this. We’re having job growth for small businesses, but it has definitely declined some in June. That reflects the tight labor market and the very low unemployment rate. Firms really have a more difficult time recruiting. They sometimes have less work flexibility and benefits, so it makes it a bit more difficult in a tight market for them to do the hiring. On the other hand, the hourly earnings growth is up 2.65 percent. That was a nice pickup in June.”

Paychex found that small business job growth declined in all regions of the country in June, with the Northeast being the weakest region. The South stayed remained the top region for small business employment growth. The Midwest and the Northeast experienced the biggest acceleration in hourly earnings in June, but wage growth was still highest in the West. Weekly earnings growth in the South and Midwest was significantly lower than hourly earnings growth among all regions.

“The jobs index decrease was across all regions of the country, with the South doing the best,” said Mucci. “The South is seeing more of a migration of people down there so there are probably more people able to be hired. Their wage rates are a little bit lower versus the Midwest or Northeast, so I think the hiring is picking up there as well.”

All 20 states analyzed by Paychex experienced declines in small business job growth in June, but five of them (Massachusetts, North Carolina, Pennsylvania, Tennessee and Virginia) stayed in positive territory for the quarter. Small business employment growth continued to be strong in Texas and Tennessee.

In terms of wages, hourly earnings growth was fastest in Illinois. Indiana, on the other hand, ranked lowest among the states on hourly earnings growth.

In terms of metropolitan areas, Miami led the way with a 0.25 percent gain on small business employment growth in June. Denver, Atlanta, Phoenix and Seattle all experienced declines in June.

San Diego saw the highest hourly earnings growth among metropolitan areas, at 4.24 percent, and was the only metro area with above 4 percent growth. Chicago’s hourly earnings growth continued to increased rapidly in June. though, and at 3.89 percent, it ranked in second place among metro areas.

The pace of small business employment growth declined for all industry sectors in June, although the education and health services sector had the strongest one-month, three-month, and 12-month growth rates among industries.

The leisure and hospitality sector slowed the most in terms of small business job growth in June, by 0.85 percent. But hourly earnings growth in leisure and hospitality continued to accelerate to 4.70 percent in June. The one-month and three-month annualized rates for that sector averaged more than 5 percent in 2019. On the other hand, hourly earnings growth in the education and health services sector stagnated during the past quarter, ranking in last place among industries at 1.29 percent.

“The job sectors were all down, but I manufacturing was down quite a bit, and leisure and hospitality was down a bit,” said Mucci. “Quite a few minimum wage increases went into effect, and they could be impacting the leisure and hospitality side. People are trying to get by with the employees they have versus hiring. Trade and transportation were down, which includes retail. I don’t think that would be a surprise that there’s a slowdown in hiring in the big-box stores.”

He believes accountants will be able to help their small business clients adjust to changes such as the Internal Revenue Service’s increasing emphasis on investigating payroll tax fraud. “You’re continuing to see the IRS talking about enforcement, but now they’re using more data analytics,” said Mucci. “They may have fewer people because of budget reasons, but they’re using data analytics to drive more enforcement of payroll taxes in particular. I think accountants should be advising their clients to be more careful about payroll taxes.”

Another recent development is the new draft version of the Form W-4 withholding certificate, for which the IRS is still accepting comments. “The new form is certainly simplified from the earlier drafts, based on the comments, but it still has at least one more round to go before a finalized draft is released in the late summer,” said Mucci.

He advises accountants to keep an eye on minimum wage increases in various states to make sure their small business clients stay in compliance. “We’re again seeing a number of minimum wage increases by state,” said Mucci. “It’s being pushed up to that $15 rate. Connecticut just became the seventh state to increase the minimum wage to $15 an hour. It’s mostly in the Northeast, in New Jersey, New York and Maryland, but you’re seeing it in California as well.”

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