Changing Search for Employees
Labor markets have changed substantially over the last year. After nearly a decade of rapidly growing employment and steadily declining unemployment, the last 12 to 15 months have seen the former flatten and the latter begin to reverse course. NFIB’s Small Business Economic Trends shows the tightest labor markets for small employers were recorded in the summer and autumn of 2000. However, job vacancies continued at near record levels through February. Plans to increase labor forces began to fade in early autumn, but remain historically strong through the present. Meanwhile, the percentage of small-business owners reporting the “Quality of Labor” as their single most important problem peaked in May 2000 at 24 percent of the population even if the figure has waned somewhat since. These circumstances offer two important reasons to examine labor markets as they impact small business at this point in time: labor markets are in transition due to the economic slowdown. Transition allows investigation of how small employers adjust to labor market changes. Second, though labor markets are currently softening, the long-term outlook is for significant labor and skill shortages. Despite the transitory nature of the current situation, many small employers continue to operate in difficult local labor markets. A core of firms operating in difficult markets present an opportunity to understand how small employers react to difficulties finding qualified employees. Thus, this edition of the National Small Business Poll focuses on the Changing Search for Employees, one of the most pressing problems that small-business owners face.
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The Current Labor Market
In late spring of 2001, most small employers believe that labor markets remain difficult. Nineteen (19) percent maintain that finding qualified employees in their geographic area is “very hard” and another 29 percent maintain that finding them is “hard” (Q#1). Just 14 percent feel that qualified employees are “not too hard to find” while 6 percent feel that they are “not at all hard to find.” About one in three (32%) have not been looking for anyone in the “last several months” and are not able to provide an assessment. Thus, of those who have recently sought employees, 71 percent say that qualified employees are hard to find while 29 percent say they are not.
Small employers feel that labor markets have not changed appreciably since the beginning of the year. Two-thirds (68%) of those who have looked for employees report that the difficulty finding people is the same now as it was at the beginning of the year (Q#2). Of those experiencing change, roughly the same proportion believe that it is now “easier” to find qualified employees (14%) compared to the beginning of the year than believe it is more difficult (13%) to find them. However, a substantial difference appears between owners of businesses employing fewer than 10 people and those employing 20 or more. Just 11 percent of the former group feel that labor markets are easing compared to 28 percent of the latter. Since larger firms are more likely to offer higher wages and benefits than smaller ones, it is likely that the former feel changes first. Smaller firms feel them later as larger firms become increasingly selective in their search for employees. The reverse appears true when markets begin to tighten.
Most small employers also feel that labor markets will change little throughout the remainder of the year. Approximately two-thirds (65%) forecast no change (Q#3). The remainder is equally divided between those who see labor markets easing (16%) and those who see them tightening (16%). If current conditions were to continue throughout the year, small employers would continue to face difficult problems finding qualified labor.
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Operating in a Difficult Labor Market
Small-business owners react in a variety of ways to overcome difficulties presented by tight labor markets. The most frequent response is that they simply don’t fill job vacancies. Two-thirds (68%) report that they have responded to tight markets, at least in part, by going without needed employees (Q#14B). The lack of a full employee complement has its most severe impact on small employers themselves. In 83 percent of the cases where small employers go without, they are personally required to work more hours (Q#14B1a). Existing employees often share the extra burden created by the vacant positions. More than three in five (62%) small employers report that their current employees are “required to work more hours” due to the employee shortage (Q#14B1b). A third possible way to compensate for the lack of employees is to reduce the firm’s output. The small employer can reduce business operating hours, refuse to make new bids or take on new orders, etc. In almost half of the cases where the owner went without needed employees (49%), he responded by limiting output (Q#14B1c).
The second most frequent response to labor market difficulties is that small employers spend more time and effort training their employees. Sixty-four (64) percent indicate that more training is a response to employee shortages (Q#14A). Customarily new employees (and higher level employees in larger firms) receive the bulk of any training given. However, small employers who report that training is a strategy to combat difficult labor markets are also likely to report that their increased training focuses on “all employees” rather than a particular category. Sixty-two (62) percent say their additional efforts are across-the-board while 15 percent indicate that it focuses on “new employees” (Q#14A1). Nine percent report additional emphasis on the “most skilled employees” with five percent each listing “employees doing a particular kind of job” and the “least skilled employees.”
The third most frequent response to the labor market difficulties focuses on recruiting. Almost 44 percent indicate that they spend more time and effort recruiting new employees (Q#14E) than before. Greater emphasis on recruiting is particularly important to firms employing more than 20 people. NFIB data collected a few years earlier indicate that the most prominent recruiting methods are “word-of-mouth,” ads in local newspaper and ads/solicitation at local schools. Those are also the three methods small employers are most likely to intensify under the present circumstances with the two former being the first choice of 69 percent (Q#14E1) of those placing more emphasis on the recruiting strategy.
The classic means of obtaining employees in a difficult labor market is to out-bid the competition. Small business is often limited in this strategy due to a lack of resources. Yet, bidding can include more flexible work arrangements and a better work environment, advantages that often accrue to smaller firms, besides the more commonly recognized higher wages and benefits. One in three small employers (34%) choose to out-bid (or try to out- bid) other potential employers with higher compensation and/or better working conditions (Q#14C). Most often they elect to out-bid the competition with higher wages (58%) and to a lesser extent expanded benefits (9%) rather than use the attributes for which small business is best known. Still, “more flexible working conditions” is the second most frequently cited method of out-bidding the competition (17%). A “better work environment” ties expanded benefits as the primary strategy for nine percent.
The least frequently employed strategy to deal with tight labor markets is the use of temporary employment agencies. Just 15 percent opt to hire temporaries from temporary agencies (Q#14C). Though their cost is relatively high, temporary employees through agencies offer several advantages. Not only do they fill vacancies for the period needed with presumably trained personnel, temporaries become potential recruits. In fact, 38 percent of those who use temporaries indicate that they have hired one or more of them as a regular employee (Q#14C1). The total number of small employers hiring in this
manner remains quite small, however, perhaps a percent or two.
The single best solution to the problem of an inadequate supply of qualified labor parallels the frequency of their use. Twenty- nine (29) percent say the best course of action (or inaction) is to do without employees (Q#15). The next most frequently cited best solution is an increased focus on training (20%). The size of a firm is closely related to a choice between these two strategies. Owners of the smallest firms, where increased effort from the owner is most likely to yield visible results, are much more likely to prefer going without (34%) while owners of the largest are much more likely to favor training (35%). The third most frequently mentioned “single best solution” is greater recruiting efforts (19%) followed by outbidding the competition (13%) and hiring temporaries (4%). A relatively large 15 percent could not or would not choose from among these alternatives.
Twenty (20) percent of all small employers and 29 percent of those who have looked for employees in the last few months judge they are not hard to find (Q#1). Given prevailing opinion to the contrary, these small employers were asked to speculate on why they experienced an adequate labor supply in their area when many others did not. Their answers reflect the variety of local conditions across the country rather than echoing a single theme. The most frequent response (22%) is that a large employer in the area recently had lay-offs or had closed (Q#16). The second most frequent response is that an unusual supply of labor exists such as college students or older people who want to work (19%). Moderate to slow business conditions (16%) is the third most frequent answer. Don’t know or refused gather the fourth most frequent number of responses (14%), not surprising given the unusual nature of the question. Lots of people moving into the area collect the fifth most number of mentions (12%). Thus, two of the five most frequent reasons given for an adequate supply of qualified labor in the area reflect conditions of low labor demand and two reflect conditions of usual labor supply. The fifth is uncertainty.
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When Conditions Ease
While the overwhelming majority of small employers feel labor market conditions have not changed since the beginning of the year or have even grown more difficult, 14 percent of those who have been in the market for employees feel conditions are easing (Q#2). They feel the impact of easing labor markets in several ways. The most frequent is a greater selection among candidates for job openings. Eighty-five (85) percent who feel labor markets easing also believe that they are now more selective in the people they hire (Q#4A). Greater selectivity translates into higher standards for prospective employees. Forty-four (44) percent choose to focus their higher standards on greater/more skill requirements (Q#4A1). The next most common election is raising requirements for personal conduct and attitude (33%). The least frequently raised requirements are work experience (13%) and education (2%).
Small employers who perceive easing labor markets report impacts in addition to being more selective in the people they chose to fill vacancies. Forty-seven (47) percent say that they now can find people with skills that they previously couldn’t find (Q#4E); 44 percent note that employee turnover is falling (Q#4D); 41 percent mention decreased pressure to meet employee (or potential employee) demands; and 36 percent are waiting longer to fill (job) openings (Q#4B). Thus, an easing labor market offers small employers a series of options that they do not have under more difficult conditions.
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Small businesses turned over an average of 14 percent of their employees since the beginning of the year. The turnover is similar by firm size in percentage terms, though larger firms obviously lost an absolute larger average number of employees. More than two-thirds (68%) of firms with fewer than 10 employees lost no one since the start of the year compared to 19 percent among those with 20 employees or more (Q#7). An average of 1.3 employees per firm left voluntarily or involuntarily over the last four months. The largest firms lost an average of 6.2 employees per firm; the middle-size group lost 1.7 employees; the smallest businesses lost an average of 0.6 employees.
Employees leave their jobs for at least one of three reasons. They leave voluntarily to do something else; they are laid-off for economic reasons; or they are terminated for disciplinary or non-performance causes. Over half leave to do something else. The second most frequent reason to leave is involuntary termination (Q#8). The least frequent reason is lay-offs due to weaker sales, the end of a job, or other economic factors (Q#9), though the number is little different from involuntary termination. Since these data do not capture lay-offs due to firm closings, it is likely that economic factors is the second most frequent reason that employees leave all small firms in contrast to the operating small firms measured here.
Most small-business owners feel that the employee turnover experienced this year is little different from the turnover experienced last year at this time. Seventy-nine (79) percent report similar turnover (Q#10). Of those noticing a difference, 12 percent suggest that there is more turnover while seven percent suggest there is less. Thus, the turnover figures reported above do not appear to be notably impacted by recent changes in economic performance, though they likely are atypically high given recent problems with hiring and keeping qualified employees.
While 38 percent of all firms lost an average of 1.3 employees per firm (somewhat less than four employees per firm losing employees annually), 45 percent of firms hired an average of 1.9 employees since the beginning of the year. Net per firm hires were just over one-half of an employee per firm. The largest were most active in taking on new people. Over three in five (62%) of the smallest didn’t hire anyone; 35 percent of the largest hired a minimum of six (Q#11). Most hiring filled existing vacancies (73%) rather than new positions (42%) (Q#12). This sample appears to be growing more rapidly than the small-business population as a whole meaning that the ratio of filling new positions to filling existing positions exaggerates the relative size of the former. Still, almost two-thirds of all new hires in this sample are simply replacements for people who left.
The current lull in economic activity has not deflated the growth intentions of many small-business owners. Sixty-five (65) percent of small employers expect to have the same size labor force at the end of the year that they currently have (Q#13). Of the remainder over seven times as many expect their labor forces to be larger (30%) as expect them to be smaller (4%).
Approximately one-third (32%) of all small employers have not been in the labor markets during the last several months (Q#1). These business owners obviously have no new positions to fill. Most (79%) also have had no recent employee turnover (Q#5); no one has left. Eleven (11) percent have not been in the labor market because people seek them out whenever there is a vacancy and six percent say they are simply not replacing people who leave. Not surprisingly, such employment stability is concentrated among firms with fewer than 10 employees.
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Labor Strategy and Satisfaction with the Workforce
Small employers approach the workforce governed by the general principle that the better workforce strategy is to focus on employee retention rather than on employee recruitment. When asked, which is the better strategy — “do all you can to retain employees working for you” or “recognize employee turnover is inevitable and focus on hiring good new people” — three of four opt for retention (Q#17). Just 12 percent choose the recruitment alternative and nine percent cannot or will not differentiate between them. Moreover, small employers hold their views strongly on this question. Ninety-six (96) percent who choose the retention focus strongly believe that that strategy is the proper approach. The much smaller proportion on the recruitment side hold their views almost as resolutely.
Small employers often express concern over the lack of job skills among prospective employees, loss of the work ethic, and other inadequacies allegedly characteristic of the contemporary workforce. The unfavorable impacts resulting are presumably magnified during periods of tight labor markets such as the one just experienced. Yet, half of all small employers say that they are “very satisfied” with their current workforce and another 41 percent say that they are “generally satisfied” (Q#6). Owners of the smallest businesses are substantially more likely to be “very satisfied,” but more than 90 percent in every size group express overall satisfaction. These contradictory opinions are difficult to reconcile. However, it is possible that they reflect the same incongruous logic that allows the public to say, ‘my Congressman is great, but the Congress is ...’
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The search for qualified employees will grow more difficult as demographic and education factors work against small employers. The size and quality of the labor force has largely been set for the next few decades. Barring massive immigration, little can be done to change it in the short-term. That means small-business owners must be nimble in their search for employees. Increasingly, they will need to spend time handling personnel matters; they will need to be more sensitive to employee wishes and respond to them creatively; they will need to train and recruit more effectively. These activities will often be difficult given the resource constraints under which most small businesses operate. But, the alternative is doing whatever necessary to avoid hiring. Many small employers already are pursuing this course. So long as not hiring represents the substitution of capital for labor, small employers may find themselves advantaged. However, when unfilled job vacancies result in unusual efforts (and hours) by the owner and current employees or limits on business activity, the full potential of the small employer’s business can never be realized. None of this, of course, is new. The decade of the ’90s previewed what is to come. But the ’90s were only a preview.