Wall Street Journal: Smaller Firms Still Hesitant to Hire
Dec 2, 2010 -
By Sarah Needleman; Wall Street Journal
When it comes to hiring, Main Street remains reluctant to fully open its doors.
U.S. small businesses continued to hire in November, this time adding the most jobs in a month's time in nearly three years, according to payroll company Automatic Data Processing Inc. But job growth remains modest compared with prerecession years, and many entrepreneurs say they plan to hold back for some time to come.
Small, privately held businesses—companies with fewer than 500 employees—added a net 91,000 jobs last month, according to the ADP data released Wednesday. Though that was a sizeable jump over October's net gain of 78,000 jobs, the average net monthly gain so far in 2010 has been just 35,000 jobs.
By contrast, small businesses in 2006 and 2007 added a monthly net average of 143,000 and 79,000 jobs, respectively, ADP's data show.
A number of factors—including pending tax legislation, the ongoing credit crunch, and changes that owners made during the recession to stay afloat—are contributing to entrepreneurs' restrained approach to hiring.
"Like a lot of investors, they're sitting on the sidelines," says Raymond Keating, chief economist for the Small Business & Entrepreneurship Council, a nonprofit advocacy group in Oakton, Va.
Small businesses play a major role in the U.S. economy, employing half of all private-sector workers, according to the U.S. Small Business Administration. They have also historically started adding jobs more quickly after recessions than large companies. For example, small businesses added a net monthly average of 38,000 jobs in 2003, while large businesses shed a net 22,000 jobs on average per month that year, ADP's data show.
Within the small-business community in general, older, established companies tend to do less hiring than young companies, says John Haltiwanger, a professor of economics at the University of Maryland. And in the current volatile economy, both groups are in many cases "unwilling to expand," he says. "You have to convince yourself that not only are sales better now, but they'll be better tomorrow."
Delta Children's Products Corp., a 42-year-old New York-based furniture manufacturer with 120 employees, has seen its revenues increase for the past two years in a row after a 25% drop in 2008. But for the most part, the family business is only filling critical vacancies. "We are scared to hire," says Joseph Shamie, chief executive. "We are very concerned about the new taxes, the unfriendly business environment and health care. We are in the dark right now."
Similarly, TechSmith Corp., a 200-employee software company founded in 1987, saw revenues increase 25% this year after a 2% decline in 2009. But the Okemos, Mich., business is "hiring at half the rate we would be if I had more confidence about the future," says Bill Hamilton, president and co-founder.
Specifically, he says he's concerned about how Congress will vote on matters that could have a substantial impact on small businesses like his, such as income taxes and the new health law's 1099 provision, which requires businesses to file a tax report when they pay a vendor more than $600 in a year. "There are no guarantees just because the House of Representatives belongs to a different party," Mr. Hamilton says.
Other small-business owners are hiring cautiously because they lack sufficient sources of funding. For start-ups, these include such tapped-out options as home-equity loans and credit cards. And for established companies, bank loans remain sparse. The SBA backed $16.84 billion in loans in fiscal 2010 ending Sept. 30, a 30% increase from 2009, but an amount well below the $20.61 billion in loans it backed in 2007.
"Small firms essentially rely very heavily on the banks for lending as opposed to big companies which can issue equity on the public markets, engage in securitizations and other complex financial transactions," says Josh Lerner, an investment banking professor at Harvard Business School. "Given this, it's not surprising that we've seen very limited evidence of job growth in terms of hiring by small businesses in the aftermath of the financial crisis."
There are also some businesses that are unable to increase their headcounts simply because they took up smaller office spaces after shedding workers during the recession. This has been the case for Almar Sales Co. Inc., a more-than 45-year-old consumer-products manufacturer and distributor in New York.
Earlier this year, the company moved into a 12,000-square-foot space, half the size of its former location, after laying off 20% of its work force in 2009. "We needed to downsize as a reaction to the economy," says Allen Ash, vice president.
Though revenues have since rebounded from a 20% drop off in 2009, the company, which now has 130 employees, isn't planning to invest in a second location. "We really need to hire, but we're being very conservative," says Mr. Ash. "What happens if the first quarter of 2011 is horrible?"
For now, many business owners are making ends meet with fewer helping hands through a variety of strategies, including outsourcing tasks to freelancers. Last month, mostly small businesses listed more than 58,800 freelance jobs on Odesk.com, about double November 2009.
Meanwhile, Noon Turf Care, a lawn-care business in Hudson, Mass., since 2002, has learned to operate leaner. Matthew Noon, president, says revenues for the 30-employee business turned positive earlier this year after a flat 2009. But while he normally would have hired seven technicians by now to compensate for the increase in demand, he instead recruited four and added more responsibilities to several positions that offer commission-based incentives.
"It really challenges you as an entrepreneur to request more from your people," says Mr. Noon. "But the economy has been a great excuse. People are very grateful to have jobs."