United States

Small Business

Administration

Office of Advocacy

No. 195

March 2000

SMALL BUSINESS

RESEARCH

SUMMARY

Labor Shortages, Needs, and Related

Issues in Small and Large Businesses

by Joel Popkin and Company

1999. [106] pages. Completed by Joel Popkin and Co.,

1155 Fifteenth Street N.W., Washington, DC 20005,

under contract no. SBAHQ-98-C-00017.

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Currently, small businesses are ranking labor shortages above taxes and government regulations as their

biggest burden. This report quantifies the extent of

the labor shortage, measures the impacts from survey

data, and examines how small businesses are coping.

The labor shortage has large implications for the

economy at large, because it would be both inflationary and unprofitable if small firms raised wages

without increasing productivity. In addition, if small

businesses are facing a labor shortage, their output

growth could slow or stagnate, thus braking the overall output growth of the U.S. economy. In theory,

small businesses would be more affected by a labor

shortage as they are more labor intensive and less

able than large businesses to substitute labor for capital.

The report also examines the possibility that contingent workers (such as temporary and contract

workers) might be a solution for small businesses

that are facing labor shortages. Subcontracting for

another firm’s labor can fill positions that small businesses might not otherwise be able to fill.

Scope and Methodology

The researchers used private and public data to evaluate labor shortages. They used data from the

Current Population Survey (CPS), a joint venture of

the Bureau of the Census and the Bureau of Labor

Statistics, to study contingent workers. They also

analyzed data collected in the Skills Deficit Survey

conducted by the National Federation of Independent

Business (NFIB) to study the labor shortage. The

CPS sampled businesses with fewer than 500

employees and the Skills Deficit Survey sampled

businesses from Dun and Bradstreet’s data base with

fewer than 100 employees.

Highlights

The report is broken into two sections: part A,

“Labor Shortages in Small Firms,” and part B,

“Contingent Workers in Small and Large Firms.”

Concerning labor shortages, the researchers found:

• In late 1998, about half of all small firms (those

with 1 to 100 employees) were looking to hire, with

about two-thirds of those reporting trouble hiring.

Thus, about a third of all small firms had trouble hiring.

• The percentage of firms reporting difficulties

filling job openings right away was at the highest

level since such records were first kept in 1974. In

1998, the percentage was almost twice as high as the

low point reached in 1991, and about three times as

high as the all-time low reported in 1982.

• About half of the companies looking to hire

someone eventually hired someone less qualified

than they were originally looking for. Slightly more

than a third of firms that had hiring difficulties

increased the time allotted for training the new hires.

• About half of the small firms that had trouble
hiring raised the wages they were originally offering,

and about a quarter raised benefits. This translated

into about 15 percent of all small firms raising wages

because of hiring difficulties.

• It is unclear if firms that raised wages raised

them above standard levels or originally offered a

wage that was too low. However, about 90 percent of

the firms that had trouble hiring felt their wage and

salary policies were at or above the market. This figure was 95 percent for firms that had no trouble hiring.

• According to the survey, hiring difficulties had

their biggest impact on employee morale and productivity. Many firms reported multiple impacts: in

addition to morale and productivity, profitability,

hours of operation, and growth were also affected.

• Slightly more firms that were having hiring troubles compared to firms without hiring troubles

upgraded their technology substantially. This suggests that a few small firms were substituting capital

(or technology) for labor.

• Firms were generally trying to fill entry-level

jobs. Of the firms that were having trouble hiring,

about three-fourths were seeking someone with one

to two years of experience, and a little less than

three-fourths were seeking someone with a high

school diploma.

• About 60 percent of the firms with hiring difficulties felt that finding workers without a history of

poor work habits and substance abuse problems was

the cause of their hiring difficulties.

• A little more than a third of firms that had trouble hiring were seeking someone with computer

skills. About a third were seeking someone with a

bachelor’s degree or greater education.

• Almost all firms that had hiring troubles used

word of mouth to recruit. About two-thirds used

local newspapers, and about a quarter used the

Internet. The latter method was more prevalent

among the larger of the small firms. As expected,

recruiting efforts increased when hiring difficulties

occurred.

• The pattern of hiring difficulties did not seem to

differ much in the different size categories of small

firms (such as firms with 1 to 4 employees, 5 to 9

employees, etc.).

Concerning contingent workers, the researchers

found:

• Contingent workers (broadly defined as workers

who expect to lose their job in the future) comprise a

little less than 5 percent of the work force.

• Small firms (those with fewer than 500 employees) employ about 45 percent of the contingent

worker force. Small firms are less likely than large

firms to hire contingent workers, but are nevertheless

a very significant employer of contingent workers.

• Small firms are more likely than large firms to

use contingent workers in blue-collar occupations.

The small firms that use contingent workers are more

likely to be in goods-producing than service-producing industries.

• While small firms in goods, trade, and service

industries all reported labor shortages (in part A of

the report), goods-producing industries are more

likely to use contingent workers as a solution

(according to part B of the report).

Conclusions

The labor shortage reported by small businesses is at

an all-time high. Employee morale, employee productivity, and small business profits are suffering as

a result. Most of the shortage appears to be at the

entry level. Small firms are hiring individuals less

qualified than they were originally looking for, raising wages, increasing recruiting, increasing their

investments in technology, and hiring temporary

workers. Although these measures may have the

effect of bringing more people into the labor force,

the labor shortage being experienced by small businesses shows no sign of abating.

Ordering Information

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is available on the Internet at www.sba.gov/advo/

research.

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