Small businesses added more jobs in May, but wage growth slowed

Small businesses added the most jobs in May since early 2022, but hourly earnings growth for employees slid to their lowest level since the middle of 2021, according to payroll processor Paychex.

The May edition of the Paychex Small Business Employment Watch indicated the Small Business Jobs Index rose 0.46 percentage points to 100.58, the biggest one-month increase since January 2022. “A lot of times we don’t see much change, but May saw a nice little bump up,” said Frank Fiorille, vice president of risk, compliance and data analytics at Paychex.

However, hourly earnings growth slowed to 3.13%, the lowest level since June 2021, for workers in U.S. small businesses with fewer than 50 employees. 

“Wages really slowed,” said Fiorille. “We have been reporting wage inflation really slowing down for a very, very long time, and then we saw a little bit of a bump up the last couple of months, but now it’s turned again with some of the lowest numbers we’ve seen in quite some time.” 

The report found, however, that weekly earnings growth was above 3% (3.09%) for the first time since January 2024 thanks to positive momentum in the number of weekly hours worked by employees in May. One-month annualized hourly earnings growth was 2.11%, over 1% below the year-over-year rate and the lowest level since November 2020, when it was 1.74%.

“What we look at in this index is the smallest of small businesses and their employees, and we’re definitely seeing some lower inflation on the wages,” said Fiorille. “Now, the good news is hourly earnings did bump up a little bit. So, it looks like maybe businesses are having a little bit of a demand bump up and having to add people to work more hours.” 

Every region of the country improved its rate of employment growth in May, led by the Midwest with a one-month increase of 0.61 percentage points to an index level of 100.94. With an index of 101.05, the South has been the fastest-paced region for small business employment growth for 19 of the past 21 months. 

“The South has been the fastest-paced region for 19 out of the last 21 months, and that continued,” said Fiorille. “The only real laggard was the West.. We’ve seen some softness, specifically in some of the big cities in California, related to some of the regulations that were put through last year on minimum wage, paid leave and other things.” 

Following eight-straight decreases, the leisure and hospitality sector increased 0.77 percentage points to a 100.26 jobs index in May, marking the largest one-month gain since February 2023.

“Construction continues to be a top performer in all areas, and then leisure and hospitality also had a nice one-month change after trending lower for quite some time,” said Fiorille.”That actually jumped up. And then, at the other end, manufacturing continues to be weak overall.”

For accountants and their small business clients, he suggested they keep an eye out for the impact of the Corporate Transparency Act and beneficial ownership interest reporting to the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN. 

“A lot of small businesses and accountants don’t know about this Corporate Transparency Act and beneficial ownership,” said Fiorille. “Businesses have got to basically register with FinCEN, and they’ve got until the end of the year to do that. Make sure that they do that. Even though it’s debatable whether there are going to be fines or not, or if they’re even going to keep it going, those [fines] are pretty hefty, so make sure that they’re in compliance on that.”

Approximately 60,000 small businesses that are members of the National Small Business Association are exempted for now as a result of a lawsuit by the NSBA.