After years of overheated competition for workers, hiring dynamics are finally starting to cool, but not in the way many small business owners might expect. The labor market is slowing, yet qualified applicants remain scarce, especially for Main Street businesses without deep recruiting benches. To stay competitive, small businesses must adapt both hiring and employee retention strategies to fit a market that is shifting beneath their feet.
Even with job growth cooling, small businesses still face fierce competition for qualified candidates. The slowdown hasn't created an abundance of talent instead, it has increased the need for employers to be strategic. To stay competitive, small business owners can focus on three priorities right now:
By focusing on brand, retention, and adaptive planning, small businesses can navigate the paradox of a slowing labor market and shrinking talent pool. Not just surviving, but positioning themselves to thrive.
Specifically, the U.S. labor market slowed sharply over the summer, according to the U.S. Bureau of Labor Statistics. Employers added an average of about 35,000 jobs over the three months ending in July, compared with roughly 128,000 per month over the prior quarter, representing a major deceleration. “Businesses hate uncertainty and that has made it [harder] for the business community to go forward with hiring,” Daniel Zhao, lead economist at Glassdoor, told ABC News in response.
At the same time, the labor market is shrinking. A report by the National Foundation for American Policy found that the U.S. workforce lost 1.7 million foreign-born workers between March and July. Over the past three decades, immigrants have accounted for more than half of U.S. workforce growth. Combined with demographic changes as Baby Boomers retire, this is setting the stage for a sustained reduced supply of workers. “The U.S. economy is currently facing two historic supply shocks, one from trade policy and the other from immigration policy,” says advisory firm EY chief economist Gregory Daco, “Both of these shocks are now apparent in the latest labor market data.”
However, the labor market snapshot is not uniform across the economy. Private education and health services added 79,000 jobs in July; professional and business services, manufacturing, and government all shed more than 10,000 jobs each. “While the health care and social assistance sub-sector accounts for just 14.6% of total jobs in the economy, 48.8% of all employment growth in the U.S. has occurred in this sub-sector over the past year,” Laura Ullrich, director of economic research at Indeed, told SHRM.
In other words, employment trends are diverging, and that means there is no one-size-fits-all answer for how employers should handle this situation. A clinic may need to emphasize employer brand and benefits to attract scarce healthcare talent, while a manufacturer facing contraction must weigh whether to hold off on hiring altogether.
On paper, a cooler job market should ease recruiting pressures, but this is where shrinking labor supply causes problems. It’s a strange situation that, in practice, means small business owners are still facing difficulties hiring. According to the National Federation of Independent Business (NFIB), 36% of owners reported unfilled job openings in June, and 86% of those trying to hire said they had few or no qualified applicants.
“Despite the slowing labor market, many small business owners are still looking to attract applicants and hire for their open positions,” said NFIB Chief Economist Bill Dunkelberg. “Compensation pressures remain strong for those owners who are competing to retain and attract talent.”
Indeed, while hiring today is nothing like the peak hiring frenzy of 2021, the number of qualified candidates remains limited. So, for small businesses, recruitment relief is muted, and the pressure to differentiate remains intense.
If finding new talent is difficult, keeping existing employees becomes all the more important. That makes employee retention strategies not just helpful but essential. NFIB reports that 33% of small business owners raised compensation in June, the largest monthly increase since early 2020, but only 19% plan to continue raising pay in the coming months. Owners are split on how aggressively they can (or need to) invest in their workforce.
In the tech sector, for example, hiring has slowed, so many workers are staying in place. Fortune writes that, far from job hunting, “workers are ‘job hugging’ in a stagnant labor market.” But be wary of short-changing long-term retention for short-term cost-savings, however, as Fortune goes on to add, “but growing resentment means they could bail as soon as the next Great Resignation comes.”
Indeed, even as employers consider how to reduce costs, employees themselves continue to weigh total rewards heavily. In a cost-sensitive environment, focus on creative recruitment and retention tactics like flexible schedules, wellness programs, tuition reimbursement, or growth opportunities. Aligning compensation and benefits with sector-specific employment trends is particularly effective. For example, healthcare workers may value continuing education, while younger retail employees might prioritize scheduling flexibility.
So, how is the job market right now? It’s challenging for everyone involved. The situation highlights a need to return to the fundamentals of recruitment and retention: continue to benchmark your compensation, benefits, and employer brand according to what your current market can support and seek out opportunities to differentiate yourself from other employers.
Thus, cultural and development investments remain critical. In other words, focusing on employee morale and engagement is evergreen. That’s true even in tight labor markets where employees have relatively fewer choices and are less likely to job hunt, and it’s especially critical in labor markets where a short supply of talent makes it harder for employers to hire.
In this environment, workforce planning must become adaptive:
On that last point, for small business owners, navigating this environment is uniquely challenging. Unlike large enterprises, they often lack dedicated HR teams. Recruiting, onboarding, and retention duties fall directly to owners already stretched thin. That’s why outsourcing HR functions can make a dramatic difference.
Partnering with a PEO can deliver enterprise-quality benefits at small business pricing. By pooling clients, PEOs provide health and retirement packages that would otherwise be out of reach, while also offering compliance support and recruiting expertise. This allows owners to focus on their core business while specialists handle fast-changing employment trends and evolving regulations.
The paradox of today’s labor market is clear. While the pace of job creation has slowed, the availability of qualified workers has not improved enough to bring true relief. For small businesses, the message is twofold: adapt recruiting strategies to sector realities, and double down on employee retention strategies to hold on to talent. Watching employment trends closely and seeking professional support can make the difference between thriving and struggling.
The question “How is the job market right now?” cannot be answered with a simple “good” or “bad.” It is both an opportunity and a challenge. Small businesses that learn to navigate this paradox will be best positioned to succeed in 2026 and beyond.
CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. For more information, learn about our Recruitment Services or contact us today.
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