Small Business Jobs Hold Steady, But Deeper Challenges Loom in 2026

ROCHESTER, NY – February 03, 2026 – The U.S. small business sector began 2026 on a note of steady, if unspectacular, consistency, with key metrics for employment and wage growth holding firm. According to the January Paychex Small Business Employment Watch, the national jobs index saw a negligible increase, while wage growth remained flat, painting a picture of stability that belies the significant headwinds business owners continue to face.

January’s Small Business Jobs Index, which analyzes payroll data for companies with fewer than 50 employees, ticked up a mere 0.04 percentage points to 99.30. Meanwhile, hourly earnings growth for workers held at 2.68%, a figure that has remained virtually unchanged since July 2025. This extended period of modest wage gains suggests an economy expanding without the threat of significant wage-driven inflation.

“As we enter 2026, the pace of employment and wage growth for America’s small businesses remains on a similar path that we saw in 2025,” said John Gibson, Paychex president and CEO, in a statement accompanying the report. “Our Small Business Job Index, combined with other information, continues to point to an economy that is expanding at a solid pace without significant inflation pressure from wages.”

A 'Great Freeze' in a Stable Market

While the top-line numbers suggest equilibrium, a deeper look reveals a more complex and decelerating trend. The jobs index has been on a multi-year cooling trajectory, falling from averages well above 100 in 2022 and 2023 to just 99.67 in 2025. The current 99.30 reading, while stable month-over-month, continues this longer-term pattern of subdued growth.

Further evidence of a cooling market comes from weekly earnings data. Weekly earnings growth slowed to 2.53% in January. More tellingly, one-month annualized weekly earnings growth has now been below two percent for three consecutive months—a pattern not seen since the economic turmoil of December 2020. This suggests a significant lack of upward pressure on paychecks.

This trend aligns with observations from other market watchers. Gusto's small business report for January described a “Great Freeze” in the labor market, where both hiring and termination rates are significantly lower than a year ago. While U.S. small businesses added a net 37,100 jobs in January according to Gusto, the overall dynamic is one of caution. This picture is further complicated by a partial federal government shutdown, which has delayed the release of the broader U.S. Employment Situation Summary from the Bureau of Labor Statistics (BLS), leaving analysts to rely more heavily on private-sector data like the Paychex report.

The Persistent Hunt for Talent

Despite the slowdown in hiring dynamics, the challenges Gibson alluded to—namely, the supply of qualified labor and rising healthcare costs—remain acute. The struggle to find skilled workers has become a chronic condition for Main Street. Recent surveys from late 2025 indicated that a staggering 89% of small business owners actively hiring reported finding few or no qualified applicants for their open positions.

For many, the issue is not a lack of applicants, but a fundamental mismatch in skills, experience, or geographic location. This “labor quality” issue was cited as the single most important problem for 21% of owners in a November 2025 survey. This persistent talent gap forces businesses to leave positions unfilled, limit operations, and delay expansion plans, creating a drag on potential growth that headline numbers may not fully capture.

Crushed by Costs: Healthcare and Taxes

Beyond staffing woes, escalating operational costs are squeezing margins. The cost of health insurance, in particular, has become an existential threat. According to the National Federation of Independent Business (NFIB), rising healthcare costs have been the number one problem for small businesses since 1986. With premiums having surged over 120% since the turn of the century, an alarming 98% of owners now fear they will be unable to afford to offer health benefits within the next five years.

In response, Congress recently passed the “Lower Health Care Premiums for All Americans Act” (H.R. 6703), a bill aimed at expanding affordable choices for small employers. However, the relief it may provide has yet to be felt.

At the same time, business owners are navigating a new tax landscape. Paychex CEO John Gibson noted anticipation for “potential economic tailwinds from last year’s tax bill,” a piece of legislation internally referred to as the “One Big Beautiful Bill Act.” This act reportedly includes small business-friendly provisions like full expensing and new deductions for tips and overtime. Yet, awareness and implementation are lagging. This is reflected in the fact that even with potential new benefits, 20% of small business owners in December cited taxes as their single most important problem—the highest level for that concern since May 2021.

A Tale of Two Economies: Regional and Sectoral Divides

The national picture of stability masks significant divergence across regions and industries. The Midwest has solidified its position as the engine of small business job growth, leading all regions for the 20th consecutive month. Its consistent performance stands in stark contrast to the West, which has languished below an index of 100 for 21 straight months and has ranked last among regions since February 2025.

Similarly, a clear sectoral divide has emerged. The Education and Health Services sector has been the undisputed leader, marking its 20th consecutive month at the top and posting positive growth for nearly five straight years. Healthcare, specifically, saw solid gains of over 17,000 jobs in January. However, the Professional and Technical Services sector experienced sharp job losses, while the Leisure and Hospitality sector, a key driver of post-pandemic recovery, continued to trend near the bottom for job growth. This uneven performance highlights how the “steady” national economy is an average of many distinct, and often diverging, local realities.