The rate of hourly pay and hiring growth slackened last month at small businesses, which also had a harder time finding workers, according to data released Wednesday by payroll provider Paychex.
The Paychex | IHS Markit Small Business Employment Watch showed that hourly earnings growth across the U.S. decelerated to 4.02% in June from 4.24% in May, while one-month annualized hourly earnings growth is now below 3% (2.99%) for the first time since 2020.
The national Small Business Jobs Index — which measures the rate of small-business job growth in the U.S. — decreased 0.24% in June to 99.21, remaining virtually unchanged so far in 2023. Overall, employment growth slowed 0.51% during the second quarter of 2023 after increasing in the first three months of the year, though it remains a full point higher than in the year leading up to the pandemic (March 2019-February 2020).
“It does look like wage growth has started to fall a little bit,” said Frank Fiorille, vice president of risk management, compliance and data analytics at Paychex. “It’s still growing, but it has definitely come off the boil that you saw earlier.”
In terms of jobs, he pointed to similar data on small-business hiring from other sources such as the Federal Reserve’s Beige Book, the National Federation of Independent Business, and the U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) report. “It’s going back to where small businesses are having a hard time trying to fill jobs,” said Fiorille. “We think that is a supply issue that’s really driving the lack of growth. We thought maybe that had changed, but it looks like it pivoted again.”
Leisure and hospitality ranked in first place among sectors for hourly earnings growth at 4.81%, and is also the only sector to report an increase in hourly earnings growth from May to June. Construction remained the top-ranked sector in weekly earnings growth at 4.84%, and weekly hours worked growth (0.44%).
“Construction was really interesting,” said Fiorille. “Despite what you’re hearing on [interest] rates and housing sector construction, it continues to be an outperformer and is up again this month.”
In terms of job growth, leisure and hospitality was down 0.89% in June and 3.63% from last year, and the leisure and hospitality index industry’s index is below 100 for the first time in two years. Education and health services’ index remained strong (100.69), reporting the best 12-month change rate (0.29%) among industries.
The South continued to lead on small-business employment growth among regions for the 15th consecutive month at 100.12 on the index, although it was down 0.35%. The South also led on hourly earnings growth by a small margin.
Texas (4.91%) continued to report the strongest hourly earnings growth among the 20 largest states, though its growth was decelerating. At 101.89 on the index, Houston ranked in first place among metropolitan areas on small-business employment growth for the eighth month in a row.
Developments to look out for
Accountants should be watching out for trends this summer like the growing use of artificial intelligence technology like ChatGPT.
“That’s going to touch so many people in so many businesses and the accounting world,” said Fiorille. “As a company, we are really focused on it and have been doing it for many years. We have a lot of AI machine learning algorithms that help make decisions and help our clients and the employees of our clients.”
One of the AI features that Paychex has developed helps small businesses predict which employees are most likely to leave and suggests incentives to offer to keep them in the fold.
“We’ve built over 100 algorithms over the past few years in AI and machine learning,” said Fiorille. “Now we’re really doing a lot of natural language processing models. Small-business clients can see their employees and the AI tries to predict which ones we think are going to leave the firm. Then it provides some contextual learning and the top three reasons why the model is saying that employees are going to leave. Then it serves up some educational stuff on what they can do to help retain them.”
Paychex has to keep honing its AI predictive models and algorithms to see how businesses that use such features fare when it comes to retaining employees.
“You always go back and test it and look at the performance,” said Fiorille. “With the ones that use it versus the ones that don’t, you can see a much lower churn or attrition rate when you do a good apples to apples comparison.”
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