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For small businesses, a hesitancy to hire

Added costs can outweigh gains in sales

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By Megan Woolhouse
Globe Staff / February 14, 2011

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FRANKLIN — For the first time in years, Bill and Donna Olson, owners of a small contractor supply company, feel hopeful. Sales of power tools, ladders, and generators are up. More customers are visiting their showroom. Most important, nails — their business’s lifeblood — are selling again.

The uptick in sales should mean new hiring. But when Donna Olson tallies the cost of salary, unemployment insurance, and other expenses to hire even a single employee, she hesitates.

The Olsons’ seven-person company, Marathon Tool, would need to sell about 20 million more nails — enough to fill four truckloads — to pay for just one new counter clerk.

“It’s crippling,’’ she said, hovering over her calculator.

The Olsons’ caution illustrates one reason hiring has remained sluggish, even as profits climb and employer confidence grows. With the steep cost of creating a job — especially in a still uncertain economy, and particularly in industries related to construction — employers are thinking long and hard before taking on the long-term costs of additional hiring.

Unemployment remains stubbornly high, and finding ways to jump-start hiring is a national priority. Last week, President Obama implored US corporations to stop hoarding cash and use some of it to expand payrolls.

A significant acceleration in hiring, however, will depend on small businesses, such as Marathon Tool. More than half of private sector workers in both the state and nation work for companies with fewer than 100 employees, according to the US Labor Department. A recent survey by the National Federation of Independent Business, the small-business lobby, showed that while small businesses are more optimistic about economic conditions, only 3 percent plan to boost hiring.

“They feel like the recovery is coming along, that things are better and that they’ve weathered the storm,’’ said Bill Vernon, director of the federation’s Massachusetts office. “But they probably want to see a bit more before they start growing.’’

Such uncertainty leads businesses to hesitate when they consider taking on the costs of new workers. And it’s not just salaries. Associated Industries of Massachusetts, the state’s largest employer group, estimates nonwage expenses can total as much as 40 percent of annual pay in Massachusetts.

At Marathon Tool, the Olsons said hiring one counter clerk at $35,000 a year would require them to also pay $1,750 in state unemployment insurance premiums, $2,170 in federal payroll taxes, $583 for workers’ compensation insurance, and $280 for federal unemployment insurance. Just covering the salary would require them to sell about 17.5 million more nails; add the nonwage costs, and that’s another 2.4 million nails.

Costs are rising, too — which must also be considered in the hiring equation. Between 2009 and 2010, for example, Marathon tool’s state unemployment insurance costs jumped by $10,000 even as company sales plummeted 60 percent.

The Olsons are also bracing for another 40 percent increase in the spring as the state replenishes the fund that pays benefits. The state Senate recently approved freezing the rates this year to avoid such a big increase; the House has not taken action yet.

Donna Olson said she understands unemployment benefits are an important safety net for workers. But the anticipated costs make her rethink hiring.

“You’re hurting the people who should be the solution to the problem,’’ she said. “Anyone who thinks it doesn’t hurt small business is crazy.’’

Bill Olson started Marathon Tool in 1986 with a loan from a friend, buying nails manufactured in China and Korea and reselling them to New England contractors. Operating out of a sunroom in Olson’s Norfolk home, the company was a family affair. Donna Olson left her job as an elementary school teacher and helped build the business. In the early years, she said, they sacrificed profits, reinvesting whatever they earned in sales.

It paid off. By 2006, Marathon Tool had a storefront and $4 million in annual sales. At their peak, they employed 17 full- and part-time workers. “We were humming right along,’’ Donna Olson said.

In general, hiring workers in the United States is expensive, especially compared with emerging competitors such as China and India. In Massachusetts, the costs are even higher.

Massachusetts has the highest labor costs of any state, according Moody’s Analytics, a forecasting firm in West Chester, Pa. The firm’s Cost of Doing Business index estimates that overall labor costs in Massachusetts are 14 percent above the national average.

“It’s certainly a problem for employers, and if it’s a problem for enough employers, it’s a problem for the public,’’ Northeastern University economics professor Alan Clayton-Matthews said. “For job growth, one of the things you need is competitive business costs. You need to be competitive.’’

Massachusetts experienced strong job growth in the first half of last year, but the economy slowed considerably in the second half, with the state shedding 2,100 jobs in December. While Massachusetts has added jobs faster than the nation as whole over the past year, it has historically lagged national job growth.

The recent recession hit the construction industry and Marathon Tool hard. Struggling to survive in 2008 and faced with rising health care costs, the Olsons eliminated health care coverage, offering employees a one-time payment of up to $5,000.

They also laid off workers for the first time. And the layoffs of those five employees came with a price tag. Much the way auto insurance rates rise after a crash, the Olsons’ unemployment insurance rates rose after the layoffs, tightening the financial squeeze.

But in the past three months, contractors have been buying more of the cases of nails that had gathered dust in the Olsons’ warehouse. The sale of each case — containing 4,000 nails — gives Donna Olson hope.

As demand has increased, the Olsons, like many other business owners, have increased the hours of existing employees, rather than take on the costs of hiring new ones. Their company recently started scheduling overtime for the first time.

Sitting in their office, warmed by a space heater, Donna Olson said that whenever sales pick up, costs do, too. There is little break from the strain of decisions affecting their livelihood and their employees.

And hiring new employees — as Obama’s recent speech urged — still feels like too much of a risk. Yes, she said, things are better, but only in a relative way: “We’re treading water instead of sinking.’’

Megan Woolhouse can be reached at mwoolhouse@globe.com.