Small businesses are facing the lingering impacts of COVID-19 with fewer workers and bigger problems finding applicants and retaining employees.

That’s according to data collected from nearly 8,000 firms during the Federal Reserve’s annual Small Business Credit Survey. The information was analyzed for a report released last month on hiring and worker retention.

The survey collected responses from eight industries, from retail to manufacturing. But the report’s authors said the troubles of one industry stood out: leisure and hospitality.

That industry requires close person-to-person interaction, so rules that limited that kind of contact during the pandemic forced business modifications or closures. The damage that caused has had long-term effects, said Ann Marie Wiersch, a policy analyst from the Federal Reserve Bank of Cleveland.

In the survey, 69% of leisure and hospitality firms reported hiring was very difficult over the prior 12 months, and 57% reported reducing operations – the highest percentages of any industry.

“We've seen that that the leisure and hospitality firms really have been the hardest hit,” Wiersch said.

She added the varying impacts on industries highlight a reality about small businesses that policymakers should remember: They’re all different.

“We can never treat small businesses as monolithic, as if all small businesses have a common experience,” said Wiersch, a community development policy advisor. “That's never really the case because small businesses can be so varied in their operations, their challenges, their experiences.”

Survey: lack of applicants contributes more to hiring woes than competition for workers

The Small Business Credit Survey was taken in the middle of the pandemic in 2021, from September through November. The Boston Fed’s Brian Clarke, the strategic partnership manager for the survey, said the results still stand as the pandemic wanes because trends in small business take so long to emerge and fade.

A small business is defined in the survey as a company with one to 499 employees. Clarke noted that the responses in the recent survey were matched against results from 2018, to get a comparison to a time before the pandemic began affecting operations.

Among the report’s notable findings:

• 43% of small employer firms had fewer employees at the time of the survey than they did before the pandemic began.
• 44% of firms in the most recent survey said that hiring was “very difficult,” compared to 27% in 2018.
• 71% of firms said it had been very or somewhat difficult to retain workers in the prior 12 months.
• 78% of firms that reported hiring was difficult cited a shortage of applicants as a factor in those difficulties, far more than the 40% who cited competition from other employers.

Some firms hurt because they can’t meet demand for increased wages in tight labor market

According to the survey, firms responded to the hiring challenges in different ways – and it often depended on their size

Lucas Misera, a report co-author and policy analyst at the Cleveland Fed, noted that bigger businesses with over $1 million in annual revenues were more likely to say they increased wages. Meanwhile, the smallest businesses often didn’t have that option. Some had to turn down work, temporarily close, or reduce their general operations.

“Different demographics are really important when we think about how businesses are able to combat the problems they’re facing,” Misera said.

Clarke said the advantages larger firms have in a tight labor market are connected to problems smaller firms have with worker retention.

“I think if you’re an employee at a smaller firm, you might be more likely to look at a larger firm,” he said. “They're increasing wages and maybe not as likely to reduce their operating hours or increase the workload during your shift.”

Wiersch: Pandemic made this tight labor market unique

Wiersch said a relative lack of resources also affects hiring success in a tight labor market. For instance, a higher-revenue small business might have the ability to make extensive recruiting efforts and online postings. A lower-revenue firm may be limited to a placing a “Now Hiring” sign in the window.

In general, she added, the pandemic created complications for small business that just didn’t exist in tight labor markets before – including dealing with the rise of remote work options and evolving demands for child or elder care.

“This is a unique situation we're in, and really a novel one,” Wiersch said. “I think that's something people forget about when we're talking about the labor market.”