The nation’s small businesses continue to drive employment growth despite economic headwinds, according to the latest Paychex Small Business Employment Watch report. Released yesterday, the monthly benchmark shows modest but consistent hiring trends through the first half of 2025, with hourly earnings growing at their fastest pace in 18 months.
The Paychex report, which tracks data from approximately 350,000 small business clients nationwide, reveals a Small Business Jobs Index of 99.8 for June, representing a 0.3% increase year-over-year. This marks the third consecutive month of employment gains after a period of stagnation in early 2025.
“Small businesses have demonstrated remarkable resilience in the face of persistent inflation and higher borrowing costs,” said Frank Fiorille, Paychex vice president of risk management. “What we’re seeing is cautious optimism translated into steady hiring, particularly in service sectors and among businesses with fewer than 20 employees.”
The data paints a picture of a small business sector that’s finding its footing after years of pandemic-related disruptions. Hourly earnings increased 3.8% year-over-year in June, outpacing the 3.2% recorded in January. The wage growth acceleration suggests employers are competing more aggressively for talent in a still-tight labor market.
Regional differences remain pronounced. The South continues to lead employment growth with an index of 100.5, while the Northeast lags at 98.9. Texas and Florida dominate the state rankings, consistent with their population growth trends and business-friendly regulatory environments.
“The regional divergence we’re seeing reflects broader economic patterns of migration and investment,” explained Beth Ann Bovino, chief U.S. economist at S&P Global Ratings. “States with lower tax burdens and fewer regulatory hurdles are attracting both businesses and workers, creating a virtuous cycle of growth.”
Industry analysis shows construction and manufacturing sectors experiencing the most significant slowdowns, with indices of 98.2 and 98.5 respectively. These sectors face particular challenges from higher interest rates and persistent supply chain disruptions. Meanwhile, leisure and hospitality continues its post-pandemic recovery with an index of 100.7, the strongest among all sectors tracked.
The Federal Reserve’s monetary policy decisions loom large over small business prospects for the remainder of 2025. After holding rates steady at its June meeting, Fed Chair Jerome Powell indicated that rate cuts might be considered if inflation continues to moderate toward the 2% target.
“Small businesses are particularly sensitive to interest rate fluctuations,” noted Karen Kerrigan, president of the Small Business & Entrepreneurship Council. “Even a modest reduction in borrowing costs could unleash a new wave of investment and hiring in the second half of the year.”
The Paychex report also highlights an interesting demographic shift in small business hiring. Workers under 25 now represent 14.3% of new hires, up from 12.8% in 2023. This suggests younger workers are increasingly finding opportunities in smaller companies rather than exclusively pursuing careers with larger corporations.
“Younger workers are prioritizing workplace culture and flexibility over traditional corporate career paths,” said Molly Day, vice president of public affairs at the National Small Business Association. “Small businesses that can offer meaningful work experiences and competitive compensation are finding success in attracting this demographic.”
Compensation strategies are evolving as well. The data shows that beyond hourly wage increases, small businesses are enhancing benefits packages to attract and retain talent. Paychex reports a 7% year-over-year increase in the number of small businesses offering retirement plans and a 5% increase in those providing some form of healthcare coverage.
Looking ahead, economic forecasters see cautious optimism for small business employment through year-end. The Atlanta Federal Reserve’s GDPNow model predicts 2.3% economic growth for the third quarter, suggesting continued modest expansion.
“Small businesses remain the engine of American job creation,” observed Mark Hamrick, senior economic analyst at Bankrate. “Their hiring behavior often presages broader economic trends, making this sustained growth particularly encouraging.”
As small businesses navigate the remainder of 2025, they face familiar challenges: finding qualified workers, managing rising input costs, and adapting to technological change. Yet the Paychex data suggests they’re meeting these challenges with characteristic entrepreneurial spirit.
For workers, the trends point to continued opportunities in the small business sector, with the potential for meaningful wage growth and expanded benefits. For the broader economy, small business vitality remains a crucial indicator of sustainable economic health.
The July Paychex Small Business Employment Watch will be released on August 5, providing further insight into these evolving trends.
