Small business wage growth slipped in December

Hourly earnings growth slowed last month to its weakest level since March of last year, according to a report released Tuesday by payroll company Paychex.

The Paychex | IHS Markit Small Business Employment Watch indicated that the rate of hourly wage growth for U.S. small businesses declined to 4.95% year over year in December. One-month annualized hourly earnings growth fell below 4% for the third time in the past four months. That could indicate the Federal Reserve's steady ramping up of interest rates last year is beginning to have an effect on salaries.

"We're seeing wage growth start to slow," said Frank Fiorille, vice president of risk management, compliance and data analytics at Paychex. "Now, it's very early and it's slight. We've got several different kinds of indicators. We look at one-month and overall average hourly earnings, and from job switchers to job stayers. They've all peaked and are starting to come down. That's pretty good news for what the markets are wanting to see."

Despite the slowdown in wage growth, overall employment growth has been relatively steady over the past month. While job growth ticked down slightly in recent months, the national jobs index for December was unchanged from November and remains a full point higher than the monthly average during the year leading up to the pandemic. 

Also on the plus side, growth in one-month annualized weekly hours worked was positive for the fourth consecutive month, at 0.48%. 

"Although things are obviously getting tough out there, small businesses are being resilient and creative in trying to work through inflation and a tight labor market," said Fiorille. 

Leisure and hospitality continued to rank in first place among sectors in hourly earnings growth (at 6.75%) and last in terms of growth in weekly hours worked (-0.52%). The jobs index in the South improved for the third month in a row, increasing to 100.72. The South has led the pace of small-business growth among regions for the past nine months. Tennessee improved 3.20% in 2022, representing the highest growth rate among states. While Tennessee ranked last among states one year ago in December 2021, the state now ranks in seventh place at 100.34. Houston (102.75) and Dallas (102.08) have the two strongest job indexes among the metropolitan areas for the seventh month in a row.

"Dallas and Houston continue to see the best overall employment growth as migration continues into those areas," said Fiorille. "What you're seeing along with that is a little bit higher wages than you're seeing in other areas, too. From a sector standpoint, the leisure and hospitality sector had had a little bit of a bounceback as well this past month."

Accountants should continue to advise their small-business clients about changes in areas such as higher minimum wages. The SECURE Act 2.0, which Congress passed as part of the year-end omnibus spending package, also included a number of retirement-related provisions, including in 401(k) and Roth IRA plans, as well as required minimum distributions (see story). The Inflation Reduction Act, which Congress passed over the summer, also includes a number of tax credits to incentivize renewable energy sources. Tax and regulatory changes are also happening on the state level.

"On Jan. 1, there are always a lot of things that go into effect with state laws and regulations," said Fiorille. "A significant number of states have increased their minimum wage, and there are a lot of pay transparency laws and other regulations going into effect. There's a lot going on for CPAs and small businesses to be watching."