From the Great Resignation to the Great Layoff: What Ails the Tech Industry?

U.S. employers added 263,000 jobs in October. So why has the tech industry made so many layoff announcements in November when recent U.S. employment statistics show that the unemployment rate remains steady at 3.7%? Let’s explore.

Amazon plans to cut 10,000 corporate and technology jobs worldwide. In early November, Meta announced mass layoffs for 11,000 employees or 13% of its workforce. Around the same time, Twitter laid off 3,700 employees, nearly half its global workforce. Online music streaming service SoundCloud announced it would reduce around 20% of its global workforce, and digital trading app vendor Robinhood paused its recruitment efforts and let go 9% of its 3,800-member workforce. Others announcing layoffs include Stripe, DocuSign, Vimeo, Shopify, Netflix, Coinbase, Snapchat, and online real estate services company Zillow.

Coinbase CEO Brian Armstrong cites three reasons for the recent surge in tech layoffs at his company:

• A possible recession.
• A need to manage costs.
• Growing “too quickly” during a bull market.

Here are the top reasons that forced many prominent players in the technology industry to initiate a hiring freeze, lay off workers, and cut spending in the past few months.

See More: The Layoff Payoff: Using Severance Packages to Attract Talent and Protect the Employer Brand

Responding to the end to pandemic growth

Tech companies saw larger-than-average growth throughout the Covid-19 pandemic. Now that the pandemic has subsided, people are no longer locked up at home. They spend most of their time online working, shopping, communicating through social media, and streaming content, all of which have led to an increase in demand for digital services. With less online consumer activity and soaring costs due to inflation, companies have curtailed their online advertising, which nearly all tech companies rely on for revenue.

Rising inflation, interest rates and labor costs

Even in an economy subject to rising inflation, job cuts and hiring freezes are mainly concentrated in sectors with the most sensitivity to the U.S. Federal Reserve policy of raising interest rates to control inflationary costs. Layoffs in the tech sector show how fast inflation and interest rates are negatively impacting the balance sheets of the once fast-growing firms of the Covid years.

Rising inflation and rising interest rates increase the cost of doing business, leading to a reduction in corporate profits and unhappy investors. Additionally, the Great Resignation forced tech firms to raise salaries to attract and retain employees, contributing more to inflationary pressures. 

Preparing for the looming recession

While the current employment market in the U.S. is still strong, that may change within the next year as many businesses struggle to adapt to the changing economy. A recent survey by The Conference Board Opens a new window found that 98% of chief executives are preparing for a U.S. recession within the next 18 months. The Conference Board forecasts that U.S. economic growth will continue to slow over the remainder of 2022, and a recession will begin around the end of the year. While there has been recent progress in inflation data, The Conference Board predicts that inflation will remain elevated in 2023, even while job growth continues to be robust but may be cooling.

Hence, public and private venture capital firms no longer look for fast growth in their investments but instead require a strong cash flow and profitability from their portfolio companies. Tech companies are being warned by their investors to preserve cash and look for ways to cut costs, which invariably comes down to hiring freezes or job cuts. As a result, many U.S. companies have already begun mass layoffs this year to prepare for the possible downturn.

Growing too fast, beyond the point of diminishing returns

In tech and consumer businesses, where growth depends on innovation, companies must prepare to build a new growth cycle when the old one ends. This may involve eliminating a business unit, shutting down an underperforming operation or reorganizing to adjust to changes in the market. In either case, the company suddenly finds, as Amazon’s CEO found, that the organization has “too many employees” or has surpassed the point of diminishing returns.

When a company is in its growth stage, each additional employee increases productivity as each new employee becomes proficient in a specific role, allowing output per hour to increase. Each new employee results in a smaller increase in output. When the organization has reached the optimal capacity level or the marginal return (or output) is maximized, the company has reached the point of diminishing returns. Beyond that point, the marginal output starts to decline, and each additional unit of added labor will result in a smaller increase in output. At that point, the company should not invest in extra labor but improve other production factors, such as applying automation to its business processes.

See More: How To Lay Off Employees With Empathy: Hint – It’s Not a Zoom Call

Are Layoffs the Only Solution to the Economic Downturn?

Mature companies have been subject to having to respond to changing markets for decades. Companies like IBM and Microsoft have had to reinvent themselves numerous times. Defense contractors lose large contracts and have to lay off the entire team as a program concludes. But as the business slows, is a layoff always necessary?

Y Combinator, Silicon Valley’s most famous startup incubator, recently wrote an open letter to startup founders. It warned that the coming recession will have “a disproportionate impact on international companies, asset-heavy companies, low margin companies, hardtech, and other companies with high burn long time to revenue.” It further recommends that the safe move is to plan for the worst, and the best way to prepare is to cut costs.

A layoff is a failure of management to plan for a downturn. While pursuing business opportunities during high demand, the management failed to convince their employees to learn how to take on new responsibilities (and possibly sacrifice a pay raise or benefits) to move from the slow-growth areas to the fast-growth areas of the business. They failed to build a culture of learning, mobility and teamwork to facilitate reinvention.

Management needs to consider that even though the present market is growing, and there appears to be unlimited demand for their product or service, what if that demand suddenly ceases or never materializes? Will hiring more people make the company more productive or less? Thus, before expanding the current workforce to meet today’s demand, management needs to look ahead and plan for any possible downturn. 

Bottomline: Looking beyond recessionary pressures

Even during the coming recession, labor market tightness will persist. CNBC reports that by 2023, the number of high school graduates is expected to peak, and after that, it will be in decline during a period when baby boomer retirements accelerate. Furthermore, Lightcast senior economist Elizabeth Crofoot predicts: “In a year and a half we will see even fewer and fewer people available to take jobs. These forces will just accelerate through 2030, so the next several years it will be harder and harder to find people.” Rather than resorting to indiscriminate layoffs, where companies risk losing their most talented people, Crofoot says “it remains better to align supply to demand as far as the number of job openings rather than look to layoffs.” 

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