America's small businesses are running out of workers

(CNN) The pandemic forced Freed Bodyworks, a wellness center offering massage therapy, yoga, acupuncture, mental health counseling and other services, to shut down for four months. But while clients returned when it reopened in the summer of 2020, workers did not.

Almost two years later, owners Frances Reed and Jessica VonDyke were forced to shut the business' doors.

"I couldn't hire anyone," said Reed. "We never had trouble with our demand for services. It was 100% a supply issue for us."

Before the pandemic, Freed Bodyworks had 20 practitioners booking up to 550 clients a month. It reopened with a skeleton crew of eight -- too few, Reed said, to bring in enough revenue to sustain the business.

Two former staffers had departed for graduate school, three had moved to areas with a lower cost of living and several had to take on caregiving roles in their families. Moreover, the shutdown of in-person instruction at massage schools dried up what had once been a dependable pipeline of emerging talent.

"In the entire time period from when we reopened until closing, I managed to hire three people, and that was with full-time recruiting," they said.

Reed is far from alone. Small business owners across the United States today face an acute labor shortage, which experts warn has hit a crisis level.

A recent survey from the National Federation of Independent Business found that about half of small-business owners said in July they still can't fill open jobs, a near-record high in the survey's roughly five-decade history.

"Hiring has never been harder for small-business owners," said Bill Dunkelberg, chief economist for the NFIB.

While the current labor market poses a challenge for employers of all sizes, small businesses have less ammunition in the battle for talent, lacking access to the kind of cash flow, credit and economies of scale that larger corporations enjoy. That makes it harder for them to offer things like competitive wages or sign-on bonuses.

"It's likely true that the big box stores are paying more," said Harry Holzer, a professor of public policy at Georgetown University.

That puts mom-and-pop businesses at a serious disadvantage. "If they're operating on tight margins, maybe they can't afford to raise wages to lure more workers," Holzer said.

Inflation is a small-biz "double whammy"

Susan Sarich founded SusieCakes in 2006 and has grown it into a 26-bakery chain, the vast majority of which are in California. But her head count has plunged from nearly 500 before the pandemic to just over 200 now -- and rebuilding those ranks has become more and more difficult.

With gas prices in California still at around $5.30 per gallon, many prospective employees say they can no longer afford to commute an hour or more, Sarich said.

"We increased hourly pay close to 20% [but] the cost of living is off the charts," she said. "Some are commuting upwards of an hour and a half each way and you add on gas prices and it's like, how does the math work?" she said.

To cope, her bakeries remain closed two days a week and are open shorter hours. She has cut her product offerings, including dropping customer favorites like iced sugar cookies based on a beloved family recipe.

"The demand was there, but we didn't have the people, so we had to pivot pretty quickly to a reduced labor model. For us, that meant fewer days, fewer hours a day and fewer products," she said, adding that she is still down from her pre-pandemic revenue by about 15%.

Eric Groves, CEO of Alignable, an online platform for small businesses, said owners are taking it on the chin, with higher inflation both raising their costs and crimping their sales as consumers become more cautious.

"We're seeing this double whammy," he said. "It's harder to find people, and the costs are going up."

A recent Alignable survey found that only about a third of small businesses are making 90% or more of their pre-pandemic revenue, Groves said. That's worse than the results of a similar survey conducted last year, when 42% said they had recovered 90% or more of their pre-pandemic business.

"They do have to sometimes dial back the hours that they're open," Groves said. "It's this constant pressure of lower revenue, higher costs and challenges of just trying to get to the other side of this."

Workers still in the driver's seat -- for now

There's a combination of factors working against small business owners as they try to add head count.

The July jobs report showed that the unemployment rate ticked down to 3.5%, matching the half-century low it reached in February 2020. The report also showed that the labor force participation fell slightly, to 62.1%.

"Able-bodied people of the right age are just not out there looking for jobs," said David Dollar, a senior fellow at the Brookings Institution.

A number of factors are behind this, economists say: An ongoing shortage of care workers, lower immigration rates and a pervasive fear of the pandemic.

"A lot depends on, do people feel confident that we've got Covid under control?" Dollar said.

Edward Fox owns two franchises of Tradebank, a business barter service with locations in Wichita, Kansas, and Nashville. When his sole Nashville-based employee departed at the end of 2020, he spent six months searching in vain before giving up and shuttering the office. He estimates that he sacrificed $200,000 to $300,000 in lost business as a result.

"We were hoping that the job market would bounce back, that we'd have a bunch of people applying... but, man, it has been a struggle," he said.

Fox said he was constrained in his ability to raise pay because Covid quashed many of the barter deals his business brokered, knocking out around 75% of his business. Without someone on the ground in Nashville, it made it tough to recapture that revenue. "I just think that everybody is looking for the same labor pool, and it's tough," he said.

"I think employees these days want more flexibility. I think managers don't want to let go of the control they have over the employee," he said. "I think we've got a new reality we've got to face there, too."

Big hit from small-business loss

The loss of any single small business might be a drop in the ocean for the US economy, but if enough small businesses like Reed's ultimately fail due to the labor shortage, that situation could turn into an economic tsunami, experts warn. Small businesses account for nearly half of private sector employment and contribute more than 40% to the US gross domestic product.

"It would be a shame to see them go out of business. You don't want the retail sector getting more and more concentrated," Holzer said.

When vacant storefronts become a fixture on Main Streets across the nation, consumers wind up with fewer choices about where they spend their money, and workers are left with fewer places to seek employment.

"Anytime you lose jobs, it reduces the overall health of the local labor market," Holzer said. "It's good for workers to have choice as well as consumers."