Jan. 11, 2006--Just two and half years ago, Payroll Partners, a bookkeeping and accounting firm that caters to small businesses, had 14 full-time employees. It now has three.

"A lot of our clients have been downsizing, and that has a direct impact on us, too," said Manny Cosme, who founded the Vacaville, Calif.-based company in the early 1990s.

But lean times have improved, and now Cosme is hoping to hire at least three new workers in the months ahead, with a longer-term goal of rebuilding staff to pre-2001 levels. His problem now, like many business owners, may actually be a shortage of workers.

As a payroll manager, Cosme knows firsthand that hiring came to a grinding halt at the end of 2005 for many small businesses. Following three months of consecutive declines, new jobs at small businesses flattened out in December, according to the latest monthly national survey by SurePayroll, a Skokie, Ill.-based small-business payroll firm. Hiring grew by just 0.3% over the 12 months ending Dec. 31, compared to 4.4% during the same period in 2004, the survey showed.

Fueling at least part of the slowdown may be a healthy job market that has companies searching for qualified talent. In its monthly small-business optimism index, the National Federation of Independent Business, a small-business lobby group with more than 600,000 members nationwide, found employee increases in December 2005 were offset by reductions, meaning that each firm on average added virtually no new net employees.

The recent drops may be part of a looming trend. Over the next 50 years, American businesses -- big and small -- are expected to face a dramatic shortage of workers, according to a recent study by Monster, an online recruiting service based in Maynard, Mass. The anticipated decrease stems from a smaller generation of workers replacing the Baby Boomers, who will be retiring or cutting back to part-time hours en mass in the coming years, the report said.

Of 600 HR managers polled by Monster, 40% said turnover has increased in the past 12 months, while 55% expect workforce retention will be a serious challenge in just the next five years.

Facing this, many businesses are already starting to re-focus recruitment efforts, largely aimed at retaining the top employees they already have, the study showed.

A majority of firms -- nearly 70% -- have begun conducting regular employee satisfaction surveys, though just 32% said they've made workplace changes based on the results, the study found.

Business owners are also increasingly trying to create a workplace that promotes a work-life balance by "instituting policies that encourage and support a satisfying personal life," the study said.

For Peter Snider, the owner of Alco Glass, a Dallas commercial glassier, that meant reinstating a number of employee perks he shelved after the post-9/11 economic downturn. These included everything from longer vacations to more office parties. "Nothing too fancy, but every bit helps," he said.

Like Cosme, Snider is looking to hire two or three more workers this year. And along with small-business owners across the country, he's hoping higher wages will keep good employees around while attracting new ones.

Three-quarters of the HR managers surveyed by Monster said compensation was one of the top three reasons behind employee loyalty.

"I used to give out bonuses, but they were pretty much forgotten when the money was spent," Snider said. "Permanent raises are a lot more attractive."