The Small Business Labor Dilemma


Labor markets remain exceptionally tight, with over 11 million job openings but only 6 million unemployed. A sample of NFIB’s 300,000 member firms has been reporting job openings at 48-year record levels, with 51% reporting job openings that are hard to fill. Labor increases are being reported by record high percentages of owners who are trying to fill open positions and retain the workers they have. Quit rates are historically high as workers see opportunities to improve their circumstances.

For most small firms, labor costs are their largest operating expense. The percent of owners reporting higher compensation for their employees rose steadily from 2009 until 2020. The frequency of compensation gains fell sharply with the government shutdowns but then surged to 48-year record high levels. Reports of higher selling prices followed a similar path, but have remained higher in frequency than compensation gains, reversing much of the historical relationship. Reports of higher prices are running well ahead of reports of higher compensation, suggesting that other forces are pushing prices up such as supply side shortages and energy costs.

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Labor costs have not been a major problem for most of the past 48 years (Chart 1). However, over the last two years, it has surged to its highest level of concern in 48-years. Until inflation became the biggest problem, the availability of qualified workers held the top spot on the most important problem list. The shortage of qualified workers (applicants) was and is the driving force behind the surge in reported compensation gains. While job openings remain at historically high levels, so does the percent of owners trying to hire and the percent of those reporting few or no qualified applicants. Sixty-one percent (92 percent of those hiring or trying to hire) of owners reported few or no qualified applicants for the positions they were trying to fill. Thirty-three percent of owners reported few qualified applicants for their open positions and 28 percent reported none (1 point shy of the 48-year record high). A number of factors can “disqualify” an applicant including lack of experience, needed skills or training, poor social skills or appearance. Remember, this is Main Street, not Silicon Valley, a tech-oriented location.

Currently the market is experiencing a supply problem, not enough qualified workers, that is not resolving quickly through the role of higher wages attracting more workers, the way market imbalances are resolved. Still half a million short of the 2020 employment level, owners see value to adding new workers, producing more output, and serving customers. There are many forces in play, the virus, government benefit payments, and demographics (e.g., retirement and deaths) to name a few. It’s a healthy process, but a recession will totally change the picture as job openings disappear and workers become unemployed.

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