Without a doubt, the job picture is ugly. And if the 10.2% jobless rate is to start falling, economists say small businesses need to begin hiring. But the surplus of underutilized workers and tepid entrepreneur sentiment suggest small businesses will be unusually timid about bringing new employees on board.

Big companies aren’t likely to fill the gap. Brian A. Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Mass., says corporations have already set their 2010 budgets, and most aren’t hiring. “So a lot hinges on the small-business sector,” he says.

To be sure, the worst of the small-business job losses seems to be over. According to Automatic Data Processing’s National Employment Report, companies with fewer than 50 workers slashed just 75,000 jobs in October, down from 288,000 in March. Midsize companies also shed 75,000 jobs in October, while big companies cut 53,000.

Small companies historically begin hiring first in a recovery. But this time many economists expect any pickup to be belated and weak. One big reason is the credit crunch’s outsized impact on entrepreneurs. Douglas Duncan, president of Anaheim Hills (Calif.)-based Almond Hill Enterprises, a two-person software company, wants to hire back- office and marketing employees. But, he says, “I can’t get the funding.”

Other small companies have plenty of slack. The average paycheck for the 25,000 small-business clients of payroll processor SurePayroll fell 7.3% for the year through October, says President Michael Alter. That reflects, in part, a heavier reliance on independent contractors, he says. In fact, more than 4% of paychecks cut by his clients are issued to contractors—an all-time high.

Cuts in workers’ hours are also helping shrink small company paychecks. Ditto for the general economy, where the average workweek was only 33 hours in October, down from 33.5 a year earlier. When demand picks up, small companies will pile more work on existing workers rather than hire. “I think you’ll see a jobless recovery,” says Alter.

Plenty of Worries
One reason could be small businesspeople like Daniel W. Glier, president of Glier’s Meats, an 18-person, $3 million sausage maker in Covington, Ky. He says he’ll do whatever it takes to keep his headcount down. He’s handling a bump in seasonal demand by hiking the hours of employees whose hours were cut earlier this year. Glier is also using temps. That way, if he has to let them go, his unemployment insurance premiums won’t rise. Because of uncertainty over taxes and health-care reform, “I’m not going to stick my neck out right now and hire people,” he says.

The weak recovery is a concern, too. The optimism index compiled by the National Federation of Independent Business has edged up from its March nadir. But at 89.1, the index has been below 90 for six straight quarters. In the 1980-82 recession, it fell below 90 only once. An October survey by credit-card issuer Discover Financial Services found the biggest worry for entrepreneurs is the outlook for sales—even ahead of their usual ­bugaboos, taxes and health insurance. Until sales improve, hiring will be scarce.

Reprinted from the November 23 issue of BusinessWeek by special permission, copyright © 2009 by Bloomberg L.P. 

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