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DECEMBER 7, 1999


The Bad News about Prosperity: Too Much Work, Not Enough People
Small business won't get much relief in the New Year, the SBA predicts

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The labor shortage may be the Achilles' heel of a cocksure small-business sector, the U.S. Small Business Administration contends. Economic conditions have been almost ideal in the past year for entrepreneurs — strong growth, moderate interest rates, low inflation. Next year, growth is expected to remain fairly strong, though interest rates have risen. But the tight job market shows no signs of loosening up. The U.S. jobless rate in November, released on Friday, hit 4.1%, the lowest rate in nearly 30 years.

With workers in such demand, 2000 could be a surprisingly trying year, warns Bruce Phillips, SBA economic research director. His Office of Advocacy issued a report on small-business labor conditions on Dec. 1.

Small companies have long complained of being shorthanded. Now, the research, conducted by Joel Popkin & Co., suggests that some small companies are squeezing as much as they can out of their existing staff and that's inhibiting their ability to expand as fast as they'd like.

The study, which was based on U.S. Census data and a special labor market survey of 752 small companies conducted in September, 1998, by the National Federation of Independent Business, found that about half the companies surveyed were hiring and of those, 63% had some trouble finding workers. In other words, just under a third of the companies had trouble hiring (defined as jobs open more than a month or hiring someone less qualified than sought). The surveyed companies ranged in size from 1 to 99 employees, but more than half have from one to four workers.

The report, based on data collected when the jobless rate was 4.5%, indicated that the companies had more difficulty finding unskilled than highly skilled workers. For example, 10% of those seeking people with advanced degrees had trouble hiring, compared with 71% seeking high school grads. Of the companies with hiring woes, about 60% blamed the fact that they sought people without a history of poor work habits or drug abuse. "The cream has been skimmed," says Phillips. "There are fewer people able to work, and they have lower skills."

The extra workload has affected conditions at some companies. Forty percent of those that had trouble hiring said employee morale flagged as a result, while 36% said their product or service quality suffered. Thirty-five percent of the companies with hiring problems indicated that growth and hours of operation were constrained by lack of staff. "That's pretty much indicative that output could be struggling. Overall, output may settle down but not necessarily increase," says SBA economist Brian Headd.

Has the labor shortage hurt the bottom line of small companies? That's not clear from the data, which is over a year old. The SBA contends it will. Phillips warns that with consumer prices steady, small businesses will have to eat higher labor costs: "Some small firms can't pass the new costs on. The impact is lower profits."

WRONG FOOD ORDERS. Yet one of the peculiarities of this tight labor market has been subdued wages. November's nonfarm payroll data showed average hourly wages were up only 0.1% on the month in November, to $13.41, for a year-on-year increase of 3.4%, down from 3.7% in October. Two-thirds of the companies that reported trouble in finding help said their profitability was minimally affected, at worst; over 70% said their revenues were little affected; and nearly 80% said their staff shortages weren't hindering their ability to introduce new products or services.

The study does say that 53% of small companies with hiring difficulties ended up raising their salaries on open positions, and another 22% have sweetened their benefits. That's particularly galling for companies that depend on unskilled labor. For example, 40% of companies with hiring difficulties say new applicants lack basic math skills, while 21% can't operate computers properly. One third complain that applicants can't read and write English.

"People see this everyday," says Phillips. "Fast food workers who get an order wrong. Pharmacy workers who can't understand what a customer is saying." How will small businesses cope in 2000? Many will have to invest in new training programs for unskilled recruits, says Phillips. And there will be an increasing reliance on temporary workers, who require short-term training of their own.

For now, small companies are profitably riding the economic expansion. However, the downside of the New Economy seems to be relentless pressure to produce more with fewer people. That's not going away at the start of the next millennium.

By Dennis Berman in New York

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