A Tight Talent Supply Causes Small Business Hiring to Slip

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Private sector employment increased by 177,000 positions from July to August 2016, according to the ADP Research Institute® August National Employment Report (NER), but a simultaneous dip in small business hiring could be indicative of a growing talent shortage and fierce wage competition.

While this growth is still fairly high, Ahu Yildirmaz, vice president and head of the ADP Research Institute®, attributes the slight slowdown to diminished small business hiring. "As the labor market continues to tighten, small businesses may increasingly face challenges when it comes to offering wages that can compete with larger businesses," she said in the July NER.

Hiring for small businesses with 49 or fewer employees increased by just 63,000 jobs in August, down from 68,000 in July, 95,000 in June and 76,000 in May. While the goods-producing companies of all sizes shed 6,000 positions, the decrease was lower than June's loss of 36,000. Mark Zandi, chief economist of Moody's Analytics, believes that moderation in hiring patterns is a byproduct of a healthy job market. "The American job machine continues to hum along. Job creation remains strong, with most industries and companies of all sizes adding solidly to their payrolls," he explained in the August report.

Are Small Business Difficulties a Sign of the Future?

Months of consecutive job growth have diminished the supply of talented workers, causing wages to rise. The ADP Research Institute® Q2 2016 Workforce Vitality Report indicated that full-time job holders experienced an average annual wage growth of 3.2 percent, while job switchers earned 5.1 percent more over the year. Although this indicates that employers are providing fiscal incentives to employees to improve retention rates, it also speaks to the wage pressures on organizations with vacant positions.

For small businesses, the pressures of a talent shortage and rising wage pressures can take a particularly intense toll on limited budgets. Competing with regional wage pressures, particularly for skilled workers, has even forced some to reconsider their business models and worker allocations. Bakery owner Nicole Fahey is just one of many small business CEOs who worry about wage growth. In a Wall Street Journal interview, she recently wondered what wage pressures would mean "to my skilled employees who are only making a few dollars more" than entry-level talent.

With current job growth trends, small businesses may not be the only ones facing talent shortages. By all accounts, their larger counterparts are already feeling the heat. Recent studies from the Society for Human Resource Management report that 68 percent of employers are having trouble filling full-time open positions — citing skill shortages, competition and a low number of applicants as their biggest pain points.

What Would Full Employment Mean for HR leaders?

With a national unemployment rate below 5 percent, according to the National Conference of State Legislatures, there are signs that full employment may become a reality in the not-too-distant future, despite negative economic conditions on a global scale. In July, 2.1 percent of workers voluntarily quit, and an estimated 5.9 million positions are currently unfilled, as reported by the Bureau of Labor Statistics. The vast disparity between monthly job growth data and vacant positions speaks to a hard truth for HR leadership — it's not easy to replace workers who have departed.

A full employment economy could exacerbate the existing trends toward structural unemployment, defined as a skills mismatch between job seekers and open positions. In addition to doubling down on retention and engagement efforts, HR leaders may be wise to consider methods to fill skills vacancies within their own organizations. By looking toward critical skill gaps and upcoming retirements, they can prepare existing employees to assume crucial roles in the future. Additionally, proactively investing in career development programs should help HR management simultaneously aid their recruitment and retention strategies.

Looking to the Future of the Job Market

The continued growth in the August National Employment Report has assuaged many fears that the U.S. job market would face challenges due to Brexit and the resultant turmoil in international markets. While the report is positive, HR leaders should take note of the small business hiring challenges and the potential for a full-employment economy as lessons for the future. By developing a proactive strategy to develop key talent and retain employees, they can stand prepared for increased wage pressures and talent shortages that could lie ahead.