What is behind the mass layoffs in the tech industry?

The past year has been a challenging one for many industries, but it is the tech sector that has been the worst hit.

According to layoffs.fyi, a total of over 1.5 lakh tech workers experienced job losses in 2022, and it seems the purge continues in 2023 as well.

Think of any major tech company, be it Meta, Google or Microsoft, all have announced significant layoffs in the recent months and weeks.

So, what’s the deal? Why, suddenly, are all these behemoths just firing people left and right? Let’s try to understand.

Recruiting boom during the Pandemic

During the pandemic, many tech companies saw a surge in online activity as people turned to the internet for work, entertainment, and communication. In response, these companies hired more staff to meet the increased demand.

However, as the world began to return to a more normal state and businesses started to re-open, many companies found that they have over hired with generous benefits, which is not sustainable in the long run.

The overstaffing was due to the expectation that the shift towards remote work would become permanent, however, a lot of companies found this to be unfeasible. As a result, these companies are now finding that they don't need as many employees as they had initially hired.

Additionally, as the economy has been affected by the pandemic, companies are now facing a softening of advertising revenue, as well as a potential recession, which has led many tech firms to cut back on spending, resulting in layoffs.

Potential recession

For months, numerous high-profile figures like Coinbase CEO Brian Armstrong, Elon Musk, Mark Zuckerberg, and Jeff Bezos have suggested that the United States may be on the verge of an economic recession.

In the time of an economic slowdown, companies can struggle to secure funding, or to generate revenue, and layoffs can be a sign of deeper issues.

Of course, when it comes to layoffs, the impact can vary greatly depending on the size of the company. For large companies, layoffs may be a strategic move to keep shareholders happy and maintain a healthy bottom line.

These companies often have the resources and financial stability to weather economic downturns, and layoffs may be seen as a necessary step to ensure long-term success.

On the other hand, smaller startups or growth companies may be facing more fundamental challenges. These companies may not have the same financial cushion as larger companies and layoffs can have a much greater impact on their operations and overall survival.

Contagious

Now this is an interesting one. Jeffrey Pfeffer, a Stanford Graduate School of Business professor, explains that industry layoffs are contagious and, very often, not exactly evidence-based. This means that companies often imitate what others are doing.

So, if a few major companies in a sector announce large-scale layoffs, the trend is likely to spread, like we’re seeing in the tech industry right now.

Pfeffer supports his argument by giving an example from 2001, when after the 9/11 attacks in the USA, every airline except Southwest Airlines laid off employees.

Southwest Airlines, as a result, gained market share by not doing layoffs.

Even though there are various causes for the chain of mass layoffs in an industry - covid miscalculations, an imminent recession, and copycat behaviour appear to be the primary culprits in the current scenario.

As it turns out, economists predict that 2023 will be characterised by a modest recession and decelerating growth. This may result in companies decreasing their rate of employee additions.

So, if 2022 was bad, the new year doesn't look much better.

Also watch: Lenovo Yoga Slim 7 Carbon review: The lightweight wonder