Workers Are Still Needed, but Many Small Businesses Have Slowed Hiring

The portion of small-business owners who expect to expand their workforce over the next year was below 50% for the second month in a row in May, hitting the lowest level since June 2020, during the early months of the Covid-19 pandemic, according to a recent survey conducted for The Wall Street Journal.

Small businesses struggled to hire staff during the pandemic as competition for workers increased and large companies with deeper pockets scooped up many of the available job candidates. Pools of applicants have increased, making it easier for some small businesses to fill openings. But pay expectations remain high, making it tough for others to make hires.

As the economy softens in response to interest-rate increases, some entrepreneurs are paring hiring plans in response to cutbacks by their customers. Fears of an economic slowdown have also made small-business owners more cautious—and less willing to pay up for talent.

U.S. job openings dropped to their lowest levels in nearly two years in March—the latest month with available data—and layoffs rose sharply, according to the Labor Department.

Other data show the resilience of the labor market. Employers added 253,000 jobs in April, as gains from the service sector helped fuel the largest monthly increase since January, the department said.

Automation Systems, which builds specialized machines and uses them to modify parts for customers, has scooped up more than 15 employees since the start of the pandemic, most in response to an increase in business. This year, the 46-person company is looking to hire a quality technician with automotive experience, but has scrapped plans to add two machine operators.

Spending on staff training and automation, investments that the Melrose Park, Ill.-based company made when workers were tough to find, have reduced the need for additional employees.

“Last year, it was [hire] as much as we could because there were very few people to hire," said owner Carl Schanstra. “Now, we are fully staffed."

Forty-five percent of entrepreneurs said in May they expect to expand their workforces in the next 12 months, according to the survey of nearly 500 small-business owners by Vistage Worldwide, a business-coaching and peer-advisory firm. That’s down from 47% in April, 58% in March and 59% in May 2022.

“With layoffs hitting bigger companies, small businesses did see an opportunity to attract talent," said Jin Yan, an economist at workforce-data company Revelio Labs. “We do not see it continuing."

TMD Holdings, which helps companies source products, laid off three of its 26 employees at the end of February after Party City declared bankruptcy and other major retail clients cut orders. The Pittsburgh-based company is trying to automate functions such as lead generation and scheduling so it can do more with its existing staff, said TMD President Joe Kelly.

TMD hopes to offset the decline in the retail sector by expanding its industrial and custom sourcing businesses. Mr. Kelly said he would hire as many as six sales representatives this year if he could find the right people, but thinks adding one or two is more likely. “They are hard to find, but when we do find them, they are gold," he said.

Hiring challenges have made small businesses reluctant to lay off workers, but 60% of entrepreneurs said delaying hiring was their preferred way to reduce costs, according to Vistage’s survey in April. Fifty-six percent of those surveyed said they had already implemented cost-cutting measures or planned to do it.

Small-business hiring plans have been weaker on only two occasions since the launch of the survey in 2012: during the early portion of the Covid shutdown from April to June 2020 and the federal fiscal cliff crisis in 2012.

“There is no question that CEOs are downshifting into a slowing economy," said Vistage chief research officer Joe Galvin. Despite caution about adding additional workers, “no one is willing to shed the hard-earned and expensive employees they hired," Mr. Galvin said. Entrepreneurs often still struggle to fill openings when workers leave, he added.

Some companies are still pushing forward with planned increases. HPL Contract, a manufacturer of commercial office furniture in Patterson, Calif., is looking to add as many as 10 employees this year, bringing total head count close to 70. About half the new roles will be in engineering, product management and design; the rest will be production workers to help fill out a new second shift, said HPL President Frank Stratiotis.

“The rest of the year is pretty strong," Mr. Stratiotis said. “It’s up to me and my sales team to continue to stimulate [sales] and innovate." The company’s electronic lockers and personal storage units are particularly popular as employers rethink their use of office space, he said.

Some small businesses say it is getting easier to fill openings. “There’s more urgency from prospective employees," said David Poole, owner of Molly Maid of Greater Charleston in South Carolina, adding it takes fewer applicants to find the best candidates than it did 18 months ago. Mr. Poole said he has sweetened incentives for the cleaners and the pay they earn increased as the franchise raised its prices.

Talent availability varies by industry sector and role. Paul Noonan, co-owner of AvatarFleet, a software developer focused on the transportation industry, is seeing better candidates for technical roles than during the pandemic. But he is struggling to fill openings for maintenance workers at his other business, Roundhouse Apartments, which owns apartments and shopping plazas in Akron, Ohio.

“The guys who can sling paint and solder a pipe, wire an outlet," Mr. Noonan said, “they are a little harder to find."

Hourly earnings grew at the slowest pace in April since December 2021, according to Paychex, a small-business payroll processor. The slowdown is particularly notable in retail and hospitality, which have been driving recent wage gains, said Paychex vice president Frank Fiorille.

Still, salary expectations remain higher than what many entrepreneurs say they can afford.

Kaushik Guha, co-owner of the Saint James School of Medicine, based in Park Ridge, Ill., is struggling to fill a record six openings for the family-run business, which operates two basic science campuses in the Caribbean and has partnerships with teaching hospitals in three states. Roughly one-third of its 105 employees are located in the U.S.

“People who apply for a bookkeeper position are asking $61 an hour. It’s not realistic," said Mr. Guha, who is now looking to hire in smaller, lower-cost cities such as McAllen, Texas, where it already operates, instead of near Chicago, where the business is based.

The medical school may leave some positions vacant, said Mr. Guha, who anticipates that applications and enrollment will fall this year as banks tighten standards for student loans.

“These are all positions where, if we don’t find the right person at the right salary range, we would rather not fill," he said.

Write to Ruth Simon at Ruth.Simon@wsj.com