Small businesses struggle to compete on wages as available worker pool shrinks

Paul Davidson | USA TODAY

Show Caption Hide Caption Amazon's minimum wage jumps to $15 The e-commerce giant said it would increase its minimum wage on November 1 to $15 for all U.S. full-time, part-time, seasonal and temporary employees, including temps hired by agencies.

Judy Briggs, owner of a 1-800-GOT-JUNK franchise in Hopkinton, Massachusetts, raised wages 18 percent in March after she started losing employees to nationally known furniture and warehouse companies.

But those larger firms still offered starting hourly pay of $15 to $20 an hour, compared with her $12 to $14, leading to further defections from her franchise, which hauls away items such as old furniture, appliances and tires. She’s debating whether to boost pay to $15 an hour, but that could mean cutting back other benefits.

“The most I can do is $15,” Briggs says. “The bigger companies are hurting us little guys.”

Small businesses are falling behind larger companies in the race to raise wages, making it even harder for them to attract a shrinking pool of available workers now that unemployment has reached a 50-year low of 3.7 percent.

In the third quarter, annual wage growth for businesses with 49 or fewer employees averaged 2 percent, according to figures from payroll processor ADP released Wednesday. That compares with 3 percent pay gains at companies with 50 to 999 workers and 4.8 percent average salary increases at firms with 1,000 or more employees.

“As the labor market tightens, small companies are finding it harder to compete for workers against larger companies that are able to offer more competitive wages and stronger benefits,” says Ahu Yildirmaz, vice president of the ADP Research Institute.

ADP handles payrolls for about 20 percent of private-sector workers, providing a telling gauge of the overall labor market.

The disparity in compensation is taking a toll. Last month, small businesses added 56,000 jobs, compared with gains of 99,000 for midsize companies and 75,000 for large ones, ADP figures show. Over the past year, small business employment grew 1.2 percent versus about 2.5 percent at larger companies.

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The latest data also point to a shift. In the third quarter of 2017, wage growth averaged 3.3 percent at small businesses and 2.5 percent at larger companies, according to ADP. Since then, pay increases have slowed at small enterprises and accelerated at big firms.

That suggests small businesses stepped up their raises last year as they tried to attract and hold on to staffers. But the entrepreneurs have limited resources and can lift pay only so much. And so the pay gap has widened, with hourly earnings in the third quarter averaging $25.56 at small businesses and $28.84 at large ones.

The dynamic can create a negative cycle: Employees leave small businesses for fatter paychecks at larger firms. And since the small firms can’t hire as many workers as they’d like, they can’t generate as much revenue, limiting their ability to further raise wages. Big companies also export more overseas and so are reaping greater benefits from a generally healthy global economy, ADP's Yildirma says.

Briggs says sales at her 1-800-GOT-JUNK franchise are up about 22 percent so far this year, but they would be about 35 percent higher if she could find enough workers, providing her more cash for raises. She has 36 employees, down from 42 last year. And when she advertises a job opening, she typically gets 10 to 20 applications, compared with about 100 a year ago.

She may increase starting pay to $15 but that would likely require a rate increase for customers who are already paying about 5 percent higher fees as a result of the March wage hike.

“Customers start to complain if you increase rates,” she says, adding that she's also squeezed by higher taxes, insurance and dumping and recycling fees.

Briggs says some employees who leave for furniture and warehouse companies are being shortsighted. At her franchise, they can make tips and performance bonuses that may not be available at some larger firms. And she offers health coverage and 401(k) benefits.

But if she raises starting pay to $15 an hour, she might have to drop health benefits.

"I can't give it all," she says.

Chris Farkas, CEO of eAlchemy, a Petaluma, California-based company that develops business intelligence and analytics software, has even less room to compete on wages. Rather than provide across-the-board raises to his nine employees, he typically rewards the best performers and bumps up staffers whose pay is below average.

This year, he gave slightly bigger increases because of the tighter labor market, which is magnified by the competition for software developers among larger San Francisco area tech companies.

But with the tech firms boosting pay more sharply, the number of applications Farkas receives is down about two-thirds from a couple of years ago. It’s taking him about three months to fill a job opening, up from about six weeks two years ago and eight weeks last year.

Farkas is mostly responding by touting his firm’s tight-knit culture and work-life balance that typically has employees toiling no more than 40 hours a week – compared with at least 50 hours at other area tech firms – and allows them to telecommute three days a week.

But, he adds, “As the (pay) gap widens, that gets tougher and tougher."