What is happening?
The surge in tech layoffs by large companies in 2023 was driven by factors such as high inflation, rising interest rates, and a short-term focus on profitability, reflecting higher unemployment rates in West Coast states, decreased venture funding, and decreased spending on tech services and software. According to the platform form tracking layoffs in the technology sector – Layoffs.fyi, 749 tech companies have laid off about 202,399 staff from January to June 2023, compared to 164,411 layoffs in 2022 from 1,057 tech companies. The higher number of layoffs this year comes from a fewer number of companies than last year, and suggests that the workforce reductions in 2023 have been driven by large companies. As a result, West Coast states’ unemployment rates were all up from last year, while the US unemployment rate decreased this year to the lowest level since 1969. Nevada had the nation’s highest unemployment rate in April 2023 at 5.7%, California was second with 4.5%, Washington tied for third at 4.3%, and Oregon was close behind at 4%, according to the Labor Department.
What is causing it?
Several factors contribute to tech layoffs including inflation, rising interest rates, and over-hiring after the COVID-19 pandemic. Higher interest rates lead to higher borrowing cost that impact how much a company wants to borrow. Higher rates directly impact venture capitalists that do not want to invest in early ideas when the economy’s future is uncertain. Boaz Weinstein, the founder of Saba Capital Management, said “with all uncertainty in the market, it’s time to be cautious because of price increases, which leaves some space for AI development to continue,” citing the chipmaker Nvidia as a stable investment environment for the next two years or three years.
Inflation is pressuring discretionary spending, and decreasing consumer demand for tech products and services. Businesses seek to cut costs to cover their increased expenses due to inflation. Laying off employees is typically one of the first cost-cutting measures because they are one of the largest company expenses. For example, TCI Fund Management called on Alphabet, Google’s parent company, to reduce headcount to improve profitability. Firing employees in large numbers suggests the companies’ short-term focus on profitability, as demand for tech products and services decreases in a post COVID-19 era.
Big Tech companies are also struggling with volatile currency markets. Amazon Web Services, a subsidiary of Amazon that provides on-demand cloud computing platforms, has been affected by the rising value of the US dollar relative to other currencies. “Given AWS prices mostly in USD, it is working closely with international customers for whom the service has simply become more expensive. In some cases, we think this is resulting in price concession to mitigate the impact for customers,” noted JPMorgan.
Jeffrey Pfeffer, a professor of organizational behavior at the Stanford Graduate School of Business, suggests that tech layoffs represent copycat behavior. Once the first industry giant makes a radical change, many decision-makers occupying the same sector feel they should follow. Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms have together produced an average return of 53% in 2023, which prompts a question about the necessity of layoffs and what businesses should consider instead.
What is likely to happen next?
The ripple effect of the layoffs by big technology companies could be ad agencies laying off because of ad spending going down. With the collapse of Silicon Valley Bank, more venture capitalists and banks will hesitate to take on the risk of startup companies. As a result, the funding for Europe’s venture-backed startups (primarily driven by US investors) is forecasted to decline from $83 billion in 2022 to $51 billion in 2023. High interest rates are going to strengthen the dollar in the short term, which will decrease the ability of emerging countries to pay for services in US dollars. International technology companies are likely to explore domestic markets in a bid to reduce costs. As other organizations follow the lead of big tech companies in reducing the size of their workforces, decision-makers are likely to shrink their spending on services and software. If a firm wants to cut millions in costs for payroll and benefits, Mr. Barosi of AlixPartners, advises them to cut just as much in spending on third-party services.
Sources
- https://www.wsj.com/articles/west-coast-states-rode-the-tech-boom-now-they-face-higher-unemployment-falling-wages-83318105?mod=series_inflation
- https://www.cnbc.com/2023/06/05/european-startup-funding-to-drop-39percent-in-2023-as-tech-rout-continues-.html
- https:// layoffs.fyi/
- https://www.wsj.com/amp/livecoverage/stock-market-today-dow-jones-06-05-2023#:~:text=Apple%2C%20Microsoft%2C%20Alphabet%2C%20Amazon,an%20average%20return%20of%200%25
- https://www.cnbc.com/2023/06/05/european-startup-funding-to-drop-39percent-in-2023-as-tech-rout-continues-.html
- https://www.reuters.com/markets/us/investor-druckenmiller-expects-hard-landing-us-economy-bullish-ai-2023-06-07/
