Small business wage growth moderated in December

The pace of job and wage growth continued to increase steadily for most of last year at small businesses, but the rate of hourly earnings growth slackened a bit in December, payroll processor Paychex reported.

The monthly Paychex Small Business Employment Watch, released Wednesday, showed small businesses continued 33 consecutive months of job growth last year. The Small Business Jobs Index ended the year at a level of 101.21, representing 1.21% growth, in December. Hourly earnings growth of 3.48% for U.S. workers in December 2023 slipped from 4.93% in December 2022, though it was relatively unchanged from November 2023, when it was 3.47%.

Wage growth actually kept slowing throughout 2023, while the amount of growth in the number of weekly hours worked was the most stable it's been since 2018. The series of interest rate increases from the Federal Reserve have been helping to slow inflation in the past two years. 

"The growth has definitely slowed, but there's still growth," said Frank Fiorille, vice president of risk, compliance and data analytics at Paychex. "We continue to see wage inflation moderate as well and come down for the most part, reflecting what the Fed has been trying to do." 

All 20 of the biggest U.S. states reported positive job growth to end 2023 and eight of those increased their rate of job growth last year.

"We use the word 'resiliency' and small businesses have had a lot of headwinds that they've had to maneuver around in the past year," said Fiorille. "While things are moderating and slowing down a little bit, from an overall standpoint it's still a pretty good environment."

The South led the way on job growth among regions in December and had the strongest rate of job growth for 11 of 12 months in 2023, while the West region slowed the most during 2023 (1.11 percentage points).

The average pace of job growth in 2023 remained above the growth rate leading up to the pandemic (from March 2019 to February 2020) when it was 101.10.

Paychex tweaked its methodology with the December report, Fiorille explained, and any number over 100 represents growth, while below 100 represents contraction.

The leisure and hospitality industry slowed its pace of job growth the most among sectors in December by 2.46 percentage points. While the sector started 2023 in first place, it ended the year ranked sixth in terms of job growth.

"That one is the most volatile and came back really strong during COVID," said Fiorille. "Even the wage number had double-digit increases for a few months. That has really come off the boil and slowed and is getting back to a normal number."

Minimum wages are increasing this month in 22 states, according to the Economic Policy Institute, and that's likely to drive up the hourly earnings growth figures in Paychex's report for January.

"A significant number of states and cities have increased the minimum wage, and some of them are robust boosts, like California," said Fiorille. "You'll probably see that number start to tick up as well this year a little bit due to that."

In terms of job growth, the U.S. Bureau of Labor Statistics issued its monthly Job Openings and Labor Turnover Summary, or JOLTS report, on Wednesday, showing a drop-off in job openings in the month of November. On the last business day of November, the number of job openings stood at 8.8 million, down from a series high of 12.0 million in March 2022. Over the course of November, the number of hires and total separations declined to 5.5 million and 5.3 million, respectively. 

"It was a little less than expectations and it has definitely dropped, but not significantly," said Fiorille. "It's down a little bit from last month. Wages are slowly starting to tick down and hirings are down as well. It's still a tight labor market, but it's definitely slowing somewhat from a year ago."

Last month, Paychex released its top five regulatory issues for employers to watch in 2024. They include artificial intelligence regulations, data privacy and security, retirement, wage and hour laws, and workplace safety. Fiorille sees those as issues for accountants to advise their small business clients to keep an eye on as well.