What happens on May 1 Labor Day in Germany?

Suggest to check the towns' websites:
https://www.donauwoerth.de/veranstaltungen/
https://www.noerdlingen.de/tourismus/veranstaltungen/

Other towns of Bavaria have a May pole event.

May 1 being a holiday it's like a normal Sunday in Germany. Supermarkets and all other kinds of stores are closed, everything else will
be open. If the weather is fine myriads of Germans go on outings. Therefore restaurants and cafés will be overcrowded. Trains and buses run on a Sunday schedule. Trucks may not drive till 10 pm.

what goes on in small town Germany on May 1

In small town like those: not much. In Donauwörth, which has a certain industrial basis, there will probably be a union rally (of extreme boredom), Nördlingen will be flooded with day trippers.

Each town will be different. We were visiting friends in Erndtebruck a few years ago and there was a fair going on that day. Beer garden and live music in the evening. Lots of fun.