IPSHITA BAG – MARCH 17TH, 2023
EDITOR: MUIZ ZAFRI
Major tech companies, including Google, Microsoft, and Amazon, have been laying off thousands and thousands of employees. Even those with smaller workforces, like Netflix and Snap, have been cutting down on several hundreds of workers. Since the start of 2022, more than 250,000 employees in the tech industry have been let go. In fact, the actual number of tech layoffs is probably much higher than this because most layoffs don’t get reported, as noted by the creator of Layoffs.fyi, Roger Lee.
Meanwhile, since 2010, the number of students graduating with a computer science degree has increased every year, going from around 44,000 in 2010 to over 97,000 in 2020. And yet, it seems that this increased tech labor supply may now be met with decreased demand. But why has there been a decrease in tech labor demand in the first place? To understand the reasons behind the most recent layoffs, let’s first delve into some of the trends in the tech labor market over the past few years during the pandemic.
Tech Labor Market Trends
During the first few months of COVID-19 back in 2020, many were struggling financially due to job losses. This, in addition to in-person consumption at the time not being a feasible option for most, led many consumers to reduce their spending. And while some just shifted their consumption online, others were no longer tempted to make unplanned purchases. Most industries, including the tech industry, felt the weight of this. In August 2020, the unemployment rate of the tech industry peaked at 4.6%. Still, this was about half the national unemployment rate of that same month, 8.4%.
However, soon after, the economic situation improved during the last quarter of 2020 as the government handed out stimulus packages and increased unemployment benefits. As much of the economy shifted online during the pandemic and now that the economic conditions are better thanks to the government, there was a spike in demand for tech products during the period. With most people working from home, companies like Microsoft experienced a boom in demand for its software and cloud computing services.
To take full advantage of the unanticipated increase in demand, many tech companies went on a hiring spree and expanded their workforces. Competition between tech companies increased as they were on the hunt for talent, particularly those with advanced analytical skills and those who could aid the economy’s shift towards artificial intelligence and the IoT, or the Internet of Things. Not all occupations expanded though; while employment in computer science and information systems managers (5.4%), as well as computer and mathematical occupations (0.8%), rose in 2020, other occupations like electronic and electrical engineering technicians saw a decline that same year. Still, the tech workforce was larger by the end of 2020 than it was at the start of 2020.
This brings us to the present, about two years later, when several tech companies are carrying out mass tech layoffs. In January this year, Google CEO Sundar Pichai sent out a memo to his staff, which included that they “decided to reduce [their] workforce by approximately 12,000 roles,” around 6% of Google’s workforce. Similarly, Microsoft is laying off 10,000 employees by March 31st – almost 5% of its workforce. And Amazon, likewise, is letting go of over 18,000 employees, primarily in the human resources and stores divisions, though this is small relative to its workforce of 1.5 million. On top of these layoffs, all three companies, and many others, are implementing hiring freezes into the first quarter of 2023.
Reasons behind the Tech Layoffs
So what happened between the end of 2020 to the start of 2023? The truth is, tech companies overestimated how long the surge in demand for their products would continue, hence their hiring sprees. This, alongside the pessimistic projection of the economy due to the fear of a recession, has caused tech companies to reverse their earlier optimism. As a result, tech companies are now cutting back to make up for their reduced surpluses. Like several tech companies, Microsoft’s profits were down by 12% in the last quarter of 2022 compared to the last quarter of 2021. With tech application activity now at pre-pandemic levels once again and the government stimulus money all spent, consumer demand for tech is no longer as high as it once was.
Decreased consumer demand for tech services and products isn’t the only reason profits took a hit. Tech stocks haven’t been doing too well either. This is in large part due to the Federal Reserve’s decision to increase interest rates back in March 2022, to combat the high inflation that occurred during the pandemic. Higher interest rates mean that future earnings look less valuable to stock investors. As a result, firms are often forced to set lower stock prices, causing the value of stocks to fall. Hence, the cost of borrowing for firms increases. This eats into the profits of companies that rely on stocks for funding, which includes tech companies.
Short-term costs, Long-term gains
While the goal of the layoffs may be to reduce labor costs, the severance packages many tech companies are offering to ease their former employees’ transition out of their workforce means that these companies may have to wait a few months before they can start to see the full impact of the layoffs on profits. As Pichai added in his memo, Google is providing laid-off workers 16 weeks of salary with an additional 2 weeks of salary for every year they worked at Google, at least 16 months VSU, 6 months of healthcare, job replacement services, and immigration support. Meta and Amazon, amongst others, are following a similar strategy to Google, varying the severance package based on the workers’ years of employment along with other factors.
Some tech companies are more private about their compensation plans, like Microsoft, which stated that they will give laid-off employees “above-market severance pay,” but did not specify what this entailed. This might mean that such companies are still figuring it out or are deciding on a case-by-case basis.
In addition, it is important to note that many of these tech companies aren’t strapped for cash. Microsoft recently announced its plans to invest $10 billion in OpenAI, the creators of ChatGPT. Meanwhile, Pichai declared “code red,” in response to the release of ChatGPT, and now Google is busy developing their own experimental chatbot called Bard.
Evidently, despite the recently reduced profits and while still paying laid-off workers in terms of severance packages, these companies could still afford to fund such projects. Still, in the interest of profit maximization, tech companies are likely cutting their employees because while it may not alleviate costs in the short-term, in the long-term it will free up resources that will allow the companies to shift their focus elsewhere.
So who exactly are the tech companies laying off? The short answer is that it depends on the company. Across the board, a broad range of employees of all levels of seniority from all types of sectors, are being laid off. While Google and Twitter targeted their software engineers, Microsoft and Meta trimmed down their Human Resources departments. There are a couple of reasons why HR staff might have been hit the hardest. First, if companies are laying off employees, they are probably also reducing recruitment, which is one of HR’s roles. Hence fewer HR staff are needed. The second, and perhaps the more dominant reason, is that some of the tasks in HR are being replaced by automation. These tasks, including those related to recruitment, such as interviewing, checking references, verifying identities, carrying out health and safety assessments, and so on, can be done by AI.
Does anyone benefit from the layoffs?
Many of the smaller and medium-sized tech companies are probably not complaining about the tech layoffs from their larger counterparts. This is because most of these companies weren’t able to compete with the high wages and benefits that Silicon Valley tech companies tend to offer.
Industries that aren’t tech focused but still have a tech sector can also benefit from the tech layoffs. This includes the healthcare industry, companies in retail or manufacturing, and even the federal government. Engineers and those with similar high-tech skills can be real assets to these industries, especially those who have already had years of experience at a big tech company like Google.
With the optimistic view of the demand for tech products followed by the fear of an impending recession, it is no surprise that tech companies are reacting by getting rid of a decent chunk of their workforce. However, it is important to highlight that most tech companies, at least for now, have workforces that are greater than they were before the pandemic. Amazon for instance ended 2019 with a workforce of 798,000 employees but up till recently in 2023 has had about 1,513,000. Still, we have to wait and see how the tech labor workforce continues to change in the next coming years as the economy as a whole changes.
Featured Image Source: GizChina
Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.