In a survey released today by Union Bank of California, most small business owners anticipate higher profits in 2007 with a positive outlook for employment. But the bank's annual Small Business Survey also found that a majority of respondents face challenges securing skilled workers in a very tight labor market. In fact, the state's annual unemployment ratio was 4.8 percent in 2006, which is the lowest level since 1976 when the state employment data series was started.

According to Union Bank of California's Senior Economist Keitaro Matsuda, when the labor market is tight, employers start to offer more generous compensation packages. Even though less than half (47.7 percent) of the survey respondents offer healthcare coverage, a tight labor market seems to be forcing employers to absorb some of the rising cost of this benefit.

The survey also highlights optimism on the part of California's small business owners. Sixty-seven percent of survey respondents expect profits to be higher in 2007 than in 2006. But 2006 was a good year, as well; nearly 63 percent of owners reported that 2006 sales were up from 2005. The employment outlook in this sector is also positive ? 30 percent of owners anticipate hiring in 2007, 66 percent plan to maintain current staffing levels, and only four percent expect to have fewer employees.

?Given the optimism expressed by respondents, I am a little surprised that more businesses are not planning to add employees,? said Matsuda. ?The extremely tight labor market and rising wages are perhaps making small businesses rely more on technology for productivity gains.? In fact, approximately 35 percent intend to invest in equipment or building improvements.

?This annual survey has proved to be an excellent tool to assess the business climate in California, because small business is such a powerful driver of our economy,? said Union Bank of California's Chief Operating Officer, Philip Flynn. ?The continued optimism of small business owners has been reflected in the growth of the state, yet we see that this positive outlook is tempered by ongoing concerns about the costs of healthcare and workers' compensation.?

Among small business owners' concerns, workers' compensation still ranks high on the list. In fact, for the fourth year running, respondents identified the cost of workers' compensation insurance as the number one challenge of running a business in California. Forty-three percent cited it as their biggest worry this year, down from 51 percent in 2006 and 66 percent in 2005.

Matsuda says this progressive decrease indicates that the workers' compensation crisis is over. When asked more specifically about premiums, 20 percent of survey respondents said that their workers' compensation premiums increased, 20 percent said they decreased, and 60 percent said they stayed the same. In 2005, 46.2 percent of businesses experienced cost increases.

Matsuda explained that, in any given year, some businesses should see their workers' compensation costs increase for various reasons, such as a change in the number of workers, and some businesses should see cost decreases. ?We no longer have a lopsided situation, in which a large percentage of those surveyed witnessed cost increases,? he said. ?The state's workers' compensation insurance reform seems to have finally reached the smallest members of the business community.?

Following workers' compensation, small business owners cited the California economy (35 percent), state and local business taxes (30 percent), and healthcare costs (29 percent) as the greatest challenges of doing business in the state. As another sign of a tightening labor market, the availability of skilled labor (27 percent) moved up to the fifth position as business owners' concern from sixth in 2006, and the percentage has steadily risen over the past few years, from just 19 percent in 2004.

For the second year in a row, a slight majority (52 percent) of business owners indicated they do not offer healthcare coverage to employees. Santa Clara County bucked the trend, with 63 percent of its small business employers offering healthcare benefits.

For those employers that do offer healthcare benefits, 60 percent reported that rising costs have affected their business. While virtually no employers were forced to drop coverage, they shifted a larger portion of healthcare costs to employees (16 percent), reduced health benefits (7 percent), or a combination of the two (24 percent). Nevertheless, the percentage of employers that shifted healthcare costs to employees dropped uniformly compared with the 2006 results. Matsuda surmises that the tight labor market may be forcing employers to absorb some of the rising costs of this benefit.

In spite of these pressures, for the fourth year in a row, 30 percent of respondents selected ?Opportunities for Growth? as the top advantage for doing business in California. Twenty percent of survey respondents rated family ties as a leading advantage for working in state.

Survey Methodology

The Union Bank of California annual Small Business Survey was conducted through individual interviews of nearly 2,000 small business owners from Jan. 9, 2007 to Jan. 24, 2007 throughout California. For the purposes of the survey, Union Bank defined small businesses as businesses with annual revenue of $15 million or below.

About Union Bank of California

Based in San Francisco, UnionBanCal Corporation (NYSE:UB) is a bank holding company with assets of $52.6 billion at December 31, 2006. Its primary subsidiary, Union Bank of California, N.A., had 321 banking offices in California, Oregon and Washington, and 2 international offices at December 31, 2006. The company's Web site is located at www.unionbank.com.