Labor Costs Reach Record Level of Concern for Small Businesses

A record number of small businesses, 14%, say labor costs are now their most important problem.

Labor costs jumped five percentage points in the National Federation of Independent Business (NFIB) Small Business Optimism Index for May, bringing the issue to its highest level of concern in the 52-year history of the survey. Still, it was only the third most significant problem for small businesses, behind taxes (19%) and inflation (18%).

The index stood at 95.3 in May, below its average of 98. Meanwhile, the NFIB’s Uncertainty Index rose three percentage points from April to 91, well above its historical average of 68, signaling that small business owners remain anxious over their futures.

That unease appears to be affecting business owners’ investments in their companies. In May, job openings and hiring plans fell to their lowest levels in six years. Only 29% of all respondents reported having job openings they could not fill, a five-point decline from April. On the outlook side, a net 9% of owners plan to create new jobs in the next three months, down four points from April. Both readings were at their lowest mark since May 2020.

External pressures continue to affect businesses as well. Reports of supply chain disruption picked up in May, with 70% of small businesses saying they had been affected to some extent, up 6% from April.

Although the data shows small businesses are still challenged on several fronts, there were some positive trends. The number of owners citing labor quality as their most important problem fell five points to only 13%, the lowest reading since December 2016.

The NFIB’s analysis noted that many small businesses are struggling to pass rising costs on to customers, adding to the broader sense of uncertainty. “AI investment spending has contributed to some excitement in the economy,” NFIB Chief Economist Bill Dunkelberg said. “Despite the enthusiasm around AI, the overall picture is divided. More small business owners are struggling with significant and unpredictable hikes in fuel prices, which are more challenging for small businesses to pass on to their customers compared to their larger corporate competitors.”

The full NFIB Small Business Optimism Index is available here.