Despite Rising Revenues, High Labor Costs Hurt Small Businesses

Despite an unemployment rate of just 3.6% last month, The Labor Department’s Jobs Report of Friday, July 7, reported a seasonally adjusted 209,000 jobs in June, a decline from May’s gain of 306,000 jobs and below the 240,000 jobs that economists expected.

While the decline shows a slight cooling, the labor market remains strong, and wage pressures are unlikely to ease. This means that inflation is unlikely to ebb, which could result in another interest rate hike by the Federal Reserve toward the end of July. On June 13, following the Federal Reserve’s The Federal Open Market Committee (FOMC) meeting, Chair Jerome Powell said nearly all Committee members of the Fed’s chief body for monetary policy believe it is likely that some further rate increases will be appropriate this year to bring inflation down to its 2% target rate.

The Labor Department reported on July 6, a seasonally adjusted 9.8 million unfilled job openings in the U.S. on the last day of May. The demand for “high-touch workers” in service industries such as restaurants, hotels, cruise lines, nail salons, etc. remains high, and small business owners that are still looking for employees are likely paying more to get them, despite concerns about the possibility of a recession. At the same time, the Federal Reserve has shown little indication that interest rate hikes will cease. Although we received a respite in June, the likelihood of two more increases before the end of 2023 looms.

Consumer demand seems to have evolved from buying goods, including cars and computers. Now we are seeing the results of pent up demand in service industries. The reversal of fortunes in the travel industry is the obvious one. Lines are long at the airports, the dollar is strong, which helps spur international travel, and the State Department announced this week that it has been flooded with 500,000 applications each week and that 2023 may eclipse last year’s record of 22 million passports issued. It seems one cannot watch an hour of television without seeing ads for foreign and domestic tourist destinations, resorts, and cruise ships.

In late February, the National Restaurant Association released its 2023 State of the Restaurant Industry report, examining key factors impacting the nearly $1 trillion industry including the economy, workforce, and food and menu trends to forecast sales for the year ahead. The report is an authoritative look at the industry and its opportunities based on a range of national surveys of restaurant owners, operators, chefs, and consumers.

The association predicts sales in 2023 to reach $997 billion, partially driven by higher menu prices, a result of significantly increased food and labor costs. The foodservice industry workforce is projected to grow by 500,000 jobs, for total industry employment of 15.5 million by the end of the year. Meanwhile, in the post-pandemic economy, restaurant owners have begun to figure out the “new normal” of current economic conditions.

“The restaurant and foodservice industry are fueling the American economy. Our hiring rate and wage increases are outpacing the overall private sector,” said Michelle Korsmo, president & CEO of the National Restaurant Association.

Additionally, the healthcare sector added 41,100 jobs in, which brings the sector’s overall headcount to 16.8 million jobs. As members of the Baby Boom generation ages, companies involved in health care, physical therapy, senior living communities, and home care struggle to find workers. This means, naturally, that firms have to offer higher wages to compete with rivals in the industry and the offerings for lower skilled workers in other sectors. Labor has the advantage right now, and small business owners are squeezed.

It’s not only low level positions that are hard and expensive to fill. HR experts say that C-level and top level managers are difficult to find and that larger size small businesses (companies with up to 500 employees) need to pay more for top level talent.

“Companies will go to the mat to get top talent,” said Davonne Helmer, co-head of the HR Officers Practice at global talent advisory firm ZRG. “Some companies won’t budge out of compensation range, but we are in an entirely different market now. They had to compromise on who they got.”

We are in an erratic and evolving economy. In many ways, Americans have returned to pre-pandemic norms in grooming, spas, and other “affordable luxuries.” This is a positive development. Revenues are on the rise, but so are costs. Lingering inflation and the high cost of capital (resulting from interest rate hikes), are putting financial pressure on small business owners.