At the start of 2020, California’s economy was roaring—with 118 consecutive months of net job growth, a record-low 3.9% jobless rate, and the largest GDP of any U.S. state. Yet, at the start of 2021, the Golden State is outpacing the rest of the nation in a more ominous way—with a late-winter coronavirus surge pushing overall cases past the three million mark (and climbing). The devastating surge is having an unprecedented impact on lives and livelihoods throughout California, particularly in the small business sector. New platform data from Gusto—which provides HR services, including payroll and benefits, for 100,000+ small businesses nationwide—reveals how strict lockdown orders impacted hiring and headcount for small businesses throughout California, just as the governor gets ready to lift those stay-at-home orders statewide. In December ‘20, data gathered from California-based small businesses shows overall headcount statewide stalls for the fourth straight month and furloughs spiked to a five-month high. 

During the first two weeks of January ‘21, Gusto data shows a slight uptick in overall small business headcount statewide (0.28%) compared to December (0.08%). That slight increase is driven exclusively by desk-based small businesses in the professional services sector. Small businesses in the hardest-hit sectors have not yet recovered. Gusto data shows small businesses in the industries most impacted by lockdown restrictions have continued to reduce staffing levels over the first two weeks of January: Salon & Spa (-0.7%), Food & Beverage (-1.09%), and Accommodations (-1.13%). 

This report analyzes leading indicators and changes to employment at small businesses for the full month of December 2020 and first two weeks of January 2021. The findings reported below represent data points with meaningful sample sizes, but based on the distribution of Gusto’s customers, they may not be fully representative of the industry and geographic breakdown of small businesses across the United States.

Key Findings

  • California small business headcount growth stalls for fourth straight month: December .08%; November 0.8%; October 1.2%; and September 1.3% .  
  • Furloughs have spiked to a 5-month high. For the third month in a row, furloughs increased after five months of decline, and remain 91% higher than this time last year. 
  • The hardest-hit industries in California still have significant ground to make up from the major losses in March. While overall small business headcount in California is up 3.8% since March ‘20, businesses in hard-hit industries (Accommodations, Arts & Entertainment, Food & Beverage, Salon & Spa, Sports & Recreation, and Tourism) remain between 9% and 28% below March employment levels. 
  • Gusto data shows small businesses in the industries most impacted by lockdown restrictions have continued to reduce staffing levels over the first two weeks of January: Salon & Spa (-0.7%), Food & Beverage (-1.09%), and Accommodations (-1.13%).

December ‘20 Small Business Trends

California Workers on Furlough 91% Higher than Last Year

Table 1 below shows the month-by-month employment outcome for workers who were employed in California in February of 2019 and 2020. Furlough rates, termination rates, and the rate of workers experiencing a reduction in hourly wage of 10% or more have remained persistently higher than the same period last year since spring. 

Of workers who were employed prior to COVID in February ‘20, 7.2% of those workers are furloughed as of December ‘20. This is an increase from the rate of workers who were furloughed as of November ‘20 (6.1%) and a continuation of three straight monthly increases, after falling from April through September. The furlough rate observed in December ‘20 is 91% higher than the furlough rate in December of last year. These elevated furlough rates, both month-over-month and relative to last year, is a leading indicator of the impact of rising COVID cases on small businesses and the actions that their owners and operators are forced to take.

Table 1. Rates of employer actions affecting employee wages for 2019 and 2020 as compared to February of the same year.

Net Headcount Growth Falls in December

As shown by the top black line in Figure 1 below, small business headcount growth in California decreased to 0.08% in December, a deceleration from the 1.2% and 0.8% growth rates in October and November, respectively.  

The bottom panel of Figure 1 charts the components of the net hiring rate: hirings and terminations. The hiring rate among small businesses fell from November and the termination rate rose, leading to a drop in the net hiring rate.

Figure 1. Monthly net change in headcount and hiring, termination, and layoff statistics.

Cumulative Rebound in Employment Remains Below Expectations 

Between March and December, headcount overcame a deep deficit to surpass its pre-COVID levels by 3.8% (as shown in the 2020 line in black in Figure 2). However, employment growth of 3.8% is still far below the growth California’s small businesses would expect in a typical year. Over the past three years, employment has grown by an average of 16.7%. This year’s growth rate is 77% lower than what would be expected in a typical, non-COVID year.

Figure 2. Cumulative % change in headcount between the beginning of March and end of December from 2017-2020.

Industry Trends

Many Industries Still Have Not Made Up Headcount Losses

In California, headcount growth among industries hit hardest by the pandemic has largely reversed, reversing gains made since April. Employers in almost every hard-hit industry (Accommodations, Arts & Entertainment, Food & Beverage, Salon & Spa, Sports & Recreation, and Tourism) are still operating with fewer employees than they were at the beginning of March. 

Salon & Spa, Food & Beverage, Accommodations, Sports & Recreation, and Tourism have all experienced dips in employment throughout December, as COVID cases began to rise quickly across the state and lockdown orders were re-imposed.

Figure 3. Cumulative change in headcount from March 2, 2020-December 31, 2020 across industries heavily affected by COVID and all others.

Monthly Industry Growth Rates

As displayed in Figure 4, headcount among California’s small businesses grew again across many industries in December, but those most exposed to the risk of another COVID wave are now shedding staff. The largest monthly losses were seen in Food & Beverage (-3.5%), Accommodations (-3.2%), and Arts & Entertainment (-1.2%). Some of the largest changes were made in the following industries:

Largest Growth

  1. Other Professional Services (1.8%)
  2. Healthcare & Social Assistance (1.3%)
  3. Manufacturing (1.1%)

Largest Losses

  1. Food & Beverage (-3.5%) 
  2. Accommodations (-3.2%)
  3. Arts & Entertainment (-1.2%)

Figure 4. Monthly Net Changes in Headcount: October-December

Geographic Trends

Large Disparities in Recovery Exists Between Metro Areas

Table 2 presents monthly changes in hiring and terminations—as well as the net change in headcount—across California’s largest metropolitan areas. Growth in metro areas across the state was stagnant, if not negative. Net hiring rates ranged from 0.63% in the Los Angeles-Long Beach-Anaheim metro area to a paltry -0.65% employment decline in San Diego-Carlsbad.

Table 2: December % Change in Employer Actions Across California’s Largest Metro Areas

Furthermore, there is a wide discrepancy among these metro areas in their cumulative recoveries since March. Figure 5 plots the employment levels of each metro area relative to the first week of March ‘20. While Sacramento has recovered to the greatest degree by the end of the year, it did experience a sharp decline in headcount in the last two weeks of December. The San Francisco-Oakland-Hayward and San Jose-Sunnyvale-Santa Clara metropolitan areas have both just barely recovered from the pandemic-induced hole in employment (reaching headcount levels 0.2% and 1% greater than March ‘20, respectively). 

Figure 5. Cumulative change in headcount since the week of March 2, 2020 across the largest California Metropolitan Areas

Employment Changes through Mid-January ’21

While this report has focused on changes in small business employment in California through December, Gusto’s high-frequency data also allows a look into how the month of January is shaping up for small businesses. Through the first two weeks of January, net headcount has increased by 0.28%, a slight rebound from December’s 0.08% growth. 

This growth, however, is concentrated among professional services and desk-based businesses, as firms in hard-hit industries continue to lose jobs. Figure 6 extends the weekly industry-level data presented in Figure 3 through the first two weeks of January. This figure includes employment data through January 17, 2021, incorporating time over which statewide daily COVID-19 cases have remained elevated and much of California is under lockdown restrictions.

Industry Trends

While some industries have gained ground in the first two weeks of the year, several that are most sensitive to shutdown restrictions have continued to reduce staffing levels over the past two weeks. Salon & Spa (-0.7%), Food & Beverage (-1.09%), and Accommodations (-1.13%) have all experienced large drops in headcount since the end of December. 

Figure 6. Cumulative change in headcount from March 2, 2020-January 17, 2021 across industries heavily affected by COVID and all others.

Digging into the industry changes within California’s largest metropolitan areas, Los Angeles and San Francisco, Tables 3 and 4 display changes in headcount (hires, terminations, and net changes) for employers across the week of January 4, 2021. We limit the list of industries to three with a sufficient size to make valid conclusions. Almost all of these sectors have contracted or slowed this past week. Within both of these metropolitan areas, Food & Beverage businesses have contracted as restrictions on outdoor and indoor dining have taken effect. 

Table 3. Changes in Employer Actions for Los Angeles, 1/11-1/18, Among Selected Industries

Table 4. Weekly Changes in Employer Actions for San Francisco, 1/11-1/18, Among Selected Industries

About Gusto

Gusto is a modern, online people platform that helps small businesses take care of their teams. In addition to full-service payroll, Gusto offers health insurance, 401(k)s, compliance and expert HR, and more. The company serves over 100,000 businesses nationwide and has offices in Denver, New York City, and San Francisco.



The analyses described in this report were based on two separate datasets obtained from Gusto’s small business payroll, benefits, and HR applications. The first dataset used payroll data to capture employee hours, wages, and furloughing (Work Reduction & Furlough). The second dataset used data from employers hiring and terminating employees (Hiring & Termination). When we define outcomes, we’re assigning one outcome per employee per month, which can block certain outcomes (Outcome Rank Ordering).

Work Reduction & Furlough

Employees in our dataset were labeled as furloughed if they were employed for the entirety of February, March, April and May (had no termination effective during that time), and either:

  1. had earned money in the final paycheck of the preceding month but had not earned money in the final paycheck of the following month (e.g. final paycheck of February was non-zero, and the final paycheck of March was $0), or
  2. met the definition for part 1 and also continued to earn $0 on payrolls in the subsequent month, thereby on a continued furlough.

Our furlough data in this April report only looks at furloughs that were active in April and were instigated in March or April, not furloughs that began earlier and have continued through this period.

Non-terminated, non-furloughed employees were labeled as hours reduced for the June report if the total hours of their June paychecks were less than 90% of the hours on their February (used as a benchmark for pre-COVID) paychecks. This calculation was done for both 2019 and 2020, where 2019 was used to represent the counterfactual case (what would have happened). 

Presumed COVID-related differences were calculated by subtracting the rates of termination, furlough, and work reduction in 2019 from the same numbers in 2020. This rate difference was used to calculate the number of additional employees affected by each cost-saving strategy. The average dollars saved per affected employee was calculated as the difference between total February and March payrolls, divided by the number of employees, for each type of affected employee, and this dollar amount was multiplied by the COVID-related count of impacted employees to calculate the total dollars saved by each strategy.

Hiring & Termination

A given employee on Gusto can have multiple “employments,” since an employer can potentially hire, terminate, and rehire the same employee multiple times. In our Hiring & Termination dataset, a hire corresponded to an employer creating a new employment with a hiring date, and a termination corresponded to the entry of a termination date for a given employment. Layoffs corresponded to terminations where the employer listed the reason for the termination as a layoff” (one of the choices from a standardized list in Gusto’s termination flow). In order to capture a more time-sensitive view of employer activities, we recorded hires, terminations, and layoffs on the date that they were entered into the system, rather than their effective date. Terminations are also coded as voluntary or involuntary.  

Monthly reporting of termination data may differ slightly from prior reporting, as employers often log a termination several days or weeks after the employee was actually released. For example, more than a third of terminations that were created (logged in the system) in May were actually effective before May. Data in this report may also differ slightly from prior reports due to methodology improvements. Further employment changes are incorporated into this month’s analysis, such as reduction to hourly pay rate. We also separately categorized employees that worked for companies who “paused” their payroll service with Gusto. Employees that fall into this new bucket may have previously not been labeled as impacted, or may have been attributed as “hours reduced” for a given month.

When we assign an outcome to an employee for a given month, we follow this rank ordering:

  1. Employee Terminated
  2. Company Suspended/Paused
  3. Employee Furloughed
  4. Hours Reduced
  5. Hourly Pay Rate Reduced

What this means, in practice, is that if an employee’s hourly pay rate was reduced early in the month and then they were furloughed, we’ll count them toward the “Furloughed” outcome but not the “Hourly Pay Rate Reduced” outcome. The further down the rank order the outcome is, the more likely we are to undercount it in favor of something else.

Employee hires, layoffs, and terminations were aggregated weekly and monthly for a given company and work location. Hiring, termination, and layoff rates reported in this document are based on the number of times each event occurred in a given week or month, divided by the number of employees who were employed at the beginning of the period. 

Locations reported in this document are based on the most recent work location associated with the employee. Industries reported in this document are based on self-report from customers within Gusto’s product.

Luke Pardue Luke Pardue was an Economist at Gusto, researching how public policies help small businesses and their workers thrive. He received his Ph.D. from the University of Maryland, where he studied the effects of government programs on disadvantaged populations’ housing and labor market outcomes.
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