Small business pay growth slowed in February

Year-over-year hourly earnings growth for U.S. workers moderated slightly in February, continuing a trend that began mid-2022, while small business job growth held steady.

The Paychex Small Business Employment Watch, released Tuesday by payroll processor Paychex, found national hourly earnings growth moderated in February to 3.42% year-over-year, continuing a measured deceleration that started in May 2022. The national jobs growth index for February (100.67) continued to show slow and steady growth for small businesses, down only 0.26 percentage points since last July. 

“We’re still seeing some job growth,” said Frank Fiorille, vice president of risk, compliance and data analytics at Paychex. “It’s still over 100, but that growth is slowing. The same with wages — still showing wage increases, but that growth is also continuing to slow.”

On a regional basis, the West led the way on regional hourly earnings growth at 3.87%  for the ninth consecutive month, while job growth fell below the 100 level on the jobs index for the first time since March 2021. The South reported the weakest hourly earnings growth (3.11%) among regions in February, but remained the strongest region for small business employment growth (at a level of 101.35 on the index), a designation it has held for 17 of the past 18 months.

Small business job gains in the leisure and hospitality industry continued to level off after surges during the pandemic, down 0.35 percentage points from January and 5.09 percentage points from last year.

“The leisure and hospitality sector has really come off the boil,” said Fiorille. “It wasn’t that long ago, in January 2021, where leisure and hospitality was seeing almost double-digit wage growth, around 10.35, but now that number is under 3%. The West, specifically California, softened somewhat. Some of that might be from legislation and changes that took effect, or are going to take effect because sometimes businesses try to front-run that, with some of the minimum wage increases in the leisure and hospitality sector and health services.”

He advised accountants to keep an eye on the tax extenders legislation that is currently stalled in the Senate, which could affect their business clients’ ability to write off expenses for interest, depreciation, and research and development costs more quickly, while also expanding the Child Tax Credit. 

“As it gets later and later in the year, there’s probably going to be less probability it gets passed or it gets punted to later in the year,” he said.