Strong economy has a downside for Main Street: Fewer workers means higher wages

Rod Dion found his business particularly hard hit during the Great Recession. His Albany, New York-based company sells office furniture and provides interior design services — not exactly in high demand while the economy was taking a nosedive.

"The last thing people needed when they were laying people off was new office furniture," says Dion, owner of Tech Valley Office Interiors. What's more, Dion said, people stopped going to school for interior design at local schools, shrinking his pool of potential job candidates.

Nearly a decade later — as the economy kicks back into high gear, driving new business — Dion finds himself with nine employees. "For once my staff is up to snuff and working well," he says.

But not without a price. He's had to get much more aggressive in his hiring process, now paying upward of $10,000 more per year per employee. He's also gotten more creative.

"I help out with student loan debt — I make principle payments on loans of up to $300 a month; people take advantage of it," he says of his mostly Gen Z staff. "There are no limits, as long as they are a good employee."

The strong economy's ripple effect is cutting small businesses such as Dion's two ways. While a more confident consumer base is contributing to a stronger bottom line for Main Street, the labor market is tightening, making finding workers to fill positions a challenge for companies looking to capitalize. What's more, many are increasing pay for the workers they already have to keep them on board.

"Without adequate labor, small businesses are finding that they cannot fully take advantage of growth opportunities," said Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council. "This is very frustrating, as prior economic and policy uncertainties were holding many small businesses back from investing in their growth. Now that revenues are picking up and expansion opportunities are more prevalent, labor conditions are the big challenge stunting growth."

Kerrigan said that for many small businesses technology isn't a replacement for human capital and often the only solution is increasing wages.

"Small firms are definitely squeezed by current labor conditions. Many cannot find the skilled employees they need to operate or grow their businesses, and at the same time there is a limit to how much they can expend within their wage range."

It's something that's come up repeatedly in the National Federation of Independent Business' monthly optimism index, which has seen "labor quality" as the top concern for small businesses surveyed for more than half of the year — outpacing taxes and government red tape and regulations. As a result, in this month's report a net 37 percent of owners reported raising wages, a new record, and 24 percent said they plan to increase total compensation, also a near-record high.

"Firms needing workers have few options other than raising compensation to attract" them, said the group's chief economist, Bill Dunkelberg. "As long as this tightness remains in the labor market, worker compensation will rise."

Joe Olivo is facing wage pressures as his printing company undergoes an expansion over the next six months. The president of Perfect Communications in Moorestown, New Jersey, said he's looking to bring on between four and five new workers. Typically he pays between $10 and $33 an hour, depending on what shift workers are filling and their skill level, and is looking at raising pay, he said.

"We are just starting the process and definitely are seeing that we have to increase the wages of our existing personnel, especially on the lower end. We are in New Jersey, and the state hasn't passed [a proposed] $15-an-hour minimum wage, but the pressure is there. Amazon is looking to fill thousands of jobs at $15 an hour or higher, and the printing industry is already tough in terms of finding skilled people," he said.

The company has already budgeted for a 2 percent increase for its wage base this year. In addition, he pays 100 percent of health insurance premiums for employees and has been offering more paid time off and flexibility.

"What if we have to go over that? On a good year we have 3 percent profit margin," he said. "From a small business standpoint we always pitch employees that we are flexible, family-friendly — we feel it's not just a wage thing. We can offer employees a good quality of life."

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