Key findings

• Wages are forecasted to increase next year, but growth is expected to slow by 26%, making wage growth much more manageable for small businesses. While our forecasts expect wages to increase, wages in December 2025 are only expected to be 2.5% higher than in December 2024, which is much more in line with historic growth than recent years.
• Following the first full year of post-Covid normalcy, small business hiring in 2025 is expected to be similar to 2024. Gusto forecasts that the December-to-December small business hiring rate will be at 3.8% next year, compared to about 3.9% in November 2024, the most recently observed month.
• Gen Z workers will enter the labor force with hiring rates similar to recent years. Seasonal hiring patterns are driven by new workers graduating from high school, college, and trade programs every May and June. Gusto forecasts expect small businesses to hire at rates similar to previous years next summer.

Introduction 

The U.S. economy entered 2024 optimistically. The Federal Reserve signaled that the inflation that dominated much of 2021 through the first half of 2023 was under control. The economy was at full employment, meaning that most people who wanted a job could find one. People kept starting new businesses, continuing the entrepreneurial renaissance that started during the Covid-19 pandemic: 5.5 million new businesses were created in 2023 compared to only 3.5 million new businesses in 2019.

Despite a strong start to 2024, uncertainties persisted for many in the economy. Inflation proved to be more persistent than expected through the first quarter of the year. Yet by the end of the second quarter things were looking up: the Federal Reserve lowered interest rates by 1.0 percentage point between September and December 2024. Consumer spending, a key indicator for the strength of the U.S. economy, kept growing modestly throughout the year. While many job seekers reported prolonged searches, the economy continued operating at full employment.

Many small businesses responded to uncertainty by continuing their operations but limiting ambitious growth plans until they were confident in the strength of the economy. They entered a “wait and see” period and stayed there throughout most the year. These businesses actively added to the building strength of the U.S. economy by providing their goods and services. People continued to start businesses, with the U.S. economy on track to start over 5 million businesses for a fourth straight year. However, small businesses didn’t take big swings. They looked for opportunities to meet the moment, and prepared for future moves. 

As we look to 2025, the small business economy is on track to support these businesses and provide additional opportunities for growth. However, uncertainties remain. There will likely be changes to federal tax policy, interest rates are unlikely to drop to the lows of the late 2010s, technological advances like further integration with Generative Artificial Intelligence (GenAI) could increase productivity, and unknown challenges could all affect small businesses in different ways. We expect that the positive and negative risks to net each other out and the small business economy to continue its steady growth.

Wages are forecasted to increase, but growth will slow by 26% by December 2025

While we forecast wages to continue to grow in the next year, the rate of growth will moderate significantly. Wage growth was not a major driver of inflation in the last several years, but as prices went up and labor remained scarce, wages increased correspondingly. Prices continued to moderate in 2024, though inflation still exceeds the Federal Reserve’s 2% target. This allowed wage growth to also decline this year, with monthly year over year growth declining to about 3.5% from 6% two years ago.

We forecast that wages will be about 2.5% higher for small business employees in December 2025 compared to December 2024. This should provide relief to small business owners without eroding the purchasing power of employees, supporting the overall small business economy. While small businesses should expect less pressure from labor costs, that pressure won’t go away completely – especially because any growth will be on already high labor costs. To relieve some pressure resulting from higher labor costs, some cash strapped small businesses may consider different compensation or labor models. Research released earlier this year documented how some small businesses are able to increase their total employee compensation to competitive levels by implementing tipping. Additionally, many small businesses increased their use of contractors in recent years, these contractors can perform necessary tasks for the business but do not have long term labor cost commitments.

Wages are expected to increase most in the Northeast and Professional Services sectors, and will be driven by Gen Z and Millennial workers

While wage growth is expected to slow for all U.S. regions and business sectors, small businesses in the Northeast and in the professional services sectors will have higher rates of wage growth compared to other U.S. regions or sectors. Much of this is likely because many professional services firms are clustered in the Northeast, and higher wages due to higher costs in the Northeast and higher wages in professional services influence each other.

Although there are conflating effects between region and sector, professional services firms are the most likely to have adopted new productivity technology like Generative Artificial Intelligence. Research from the 2024 State of Small Business Report shows that owners of businesses that use GenAI report that their employees are more likely to exceed their expectations. This is likely due to productivity enhancements that allow employees to free time to serve customers and drive profits. 

Wage growth is expected to be highest for Gen Z and Millennial workers next year, but decline for workers across all ages. Gen Z workers are generally in entry level positions and at their lowest lifetime earnings, therefore any increase in pay – whether due to a raise in a current job or a salary increase due to a new job – will be a much larger percent change. Similarly, Millennials are still aging into more responsibility and their prime earning years. These pay increases happen on smaller bases than the average Gen X or Baby Boomer pay, meaning that the typical wage growth will be greater for these generations.

Small business hiring in 2025 is expected to be similar to 2024

Month-to-month comparisons between 2023 and 2024 shows that the overall hiring rate was more modest this year than last year, and Gusto forecasts expect that moderation to continue going into 2025. The overall small business hiring rate was about 5% in 2024, suggesting that employers spent much of the year moderately growing but primarily keeping their payrolls at levels observed in 2023. Additionally, hiring rates followed a cyclical pattern with expanded hiring in May and June of each year as new graduates from high school, colleges, and other training programs enter the workforce.

This is not expected to change in 2025, with hiring rates in June and December 2025 forecasted to be at similar levels as this year. However, small businesses should consider steps that will prepare them to take advantage of growth opportunities. These may include ensuring that their books are up to date in order to apply for loans, strengthen recruitment plans, and engage in scenario planning to take into account both a strengthening and deteriorating economy.

Despite lower hiring rates nationally, hiring will be highest in Northeastern and Southern small businesses

No U.S. region is expected to be a singular hub for all small business hiring next year. However, June 2025 hiring is expected to be highest in the Northeast (6.4%) and December 2025 hiring is expected to be the highest for small businesses located in the South (4.4%). This follows cyclical hiring patterns, where the hiring rate is highest during the middle of the year – generally May through July as new workers enter the workforce. Due to the expansion of small businesses in the south, this hiring rate will represent jobs at many new and emerging companies. This continues the trend, especially in the south, of economic expansion and small business growth.

Hiring rates are expected to be strongest in the personal and community services sectors

Consumer spending, and continued hiring as the economy has normalized from the Covid-19 pandemic, has required personal services (e.g. retail, restaurants, hospitality) businesses to expand and hire in recent years. We expect that this will continue into 2025, though there will likely be moderation. Consumers have increasingly started to substitute luxury goods with lower- and mid-tier goods, suggesting that small businesses that specialized in luxury goods may begin to experience lower demand and lower revenue. This risk may be particularly acute if the inflation rate begins to increase. 

Community services – like healthcare and education businesses – and businesses in the Goods/Producing sector – like construction and manufacturing businesses – are expected to continue their moderated hiring into 2025. Healthcare has been one of the strongest hiring sectors in the last several years, and the skilled trades have become magnets for younger workers who are starting their careers.

Gen Z continues to grow its share in the labor force

Gen Z is set to continue taking its place in the workforce during the summer months. This is traditionally a high-hiring season, and our forecast shows that we should expect the same in 2025. Gen Z workers, thousands of which enter the workforce at the end of their high school, college, or trade program training each May, June, and July, are forecasted to see similar hiring rates as in the previous couple of years.

The seasonal hiring is almost completely driven by new workers entering the labor force each summer, with a slower hiring rate for Millennial, Gen X, and Baby Boomer workers toward the end of each year. This is forecasted to continue. Millennials, who are increasingly taking on more leadership roles in their workplaces, are forecasted to end the year with the lowest hiring rate, but much of that might be due to their staying put in positions with increased responsibility.

Hiring growth in selected cities in 2024

The above chart shows the hiring rate for cities that experienced some of the highest small business growth over the past few years. Hiring rates in these cities generally followed the national trends, and have moderated with overall hiring. Hiring in these cities generally suggest that small businesses spent much of the second half of 2024 maintaining their current payrolls, including the typical end-of-year drop in hiring. 

As small businesses in this city plan for the future, they should expect increased hiring rates during the summer months similar to their regional hiring rate.

Conclusion

As we move into 2025, small businesses are navigating a period of economic moderation. While the U.S. economy shows signs of stability—bolstered by steady consumer spending, full employment, and the continued rise of new businesses—uncertainties persist, particularly regarding inflation, interest rates, and shifting tax policies. Wages are expected to grow at a slower pace, easing some of the labor cost pressures small businesses have faced in recent years. While hiring rates may moderate, there are still opportunities for businesses to expand their workforce, particularly during peak seasonal periods.

Next year offers both challenges and opportunities for small businesses. By staying informed, planning for potential risks, and remaining agile, business owners can continue to build on the solid foundation laid in 2024 and position themselves for continued success.