When layoffs happen, especially when they happen in bunches, and perhaps even more especially when they happen in a high-profile, seemingly bulletproof sector like technology? The media — and the people it influences — begin to panic. At least a little.
At the beginning of 2023, major tech firms like Google, Amazon, and Microsoft laid off more than 60,000 employees, flooding the job market with many highly qualified workers. One of the primary reasons for the layoffs cited by tech executives was the global economic outlook, particularly record inflation in the U.S.
Despite the layoffs, the January jobs report found that the economy added 517,000 jobs, pushing unemployment to a 53-year low.
So, what gives? How do the country’s biggest companies go through enormous layoffs and unemployment decreases?
The biggest reason is that tech layoffs aren’t blanket indicators of economic health. Tech layoffs happen for a range of reasons. Just because layoffs are in the news cycle doesn’t mean you need to panic about the state of the job market or the economy as a whole.
Why do tech layoffs happen?
Here are some of the reasons why tech layoffs take place. In many cases, they’re the same factors that affect other sectors, and there’s nothing unusual to them.
Cost-cutting
The primary goal of layoffs is always to cut costs. After all, every business exists to make money, and labor is the largest overhead cost for most businesses. Tech companies may reduce their workforce in response to declining revenue, increased competition, or other economic factors.
Poor performance
Similarly, if a tech company is underperforming, it may lay off employees to reduce its overhead and try to turn the business around. As the old saying goes, “You have to spend money to make money,” but when profit margins are tight and performance is lacking, a company may not have the spending power to keep all of its employees.
Restructuring
Tech companies, especially very big ones, tend to have a lot of departments. When the economy is sluggish, sometimes layoffs in marketing or sales have to happen to ensure the company can keep vital engineering or product talent. Other companies may see it the other way, wanting to invest more in lead generation, restructuring to protect sales and marketing efforts.
Whatever a company’s goals are, sometimes they call for restructuring to address changes in the market. That may lead to layoffs as some positions become redundant or unnecessary.
Mergers and acquisitions
The tech industry is especially rife for mergers and acquisitions as bigger companies swallow up smaller ones all the time. When this happens, there may be redundancies in the workforce that need to be eliminated. Overlapping roles and functions force a company to pay twice as much for the same job, which, naturally, they don’t want to do.
While the Google, Microsoft, and Amazon layoffs weren’t examples of this, it’s still an important point to understand about why tech layoffs happen.
To boost bonuses and dividends
In a capitalist system, those at the top eat first and eat the most. It’s an unfortunate reality that executives lay off employees to increase profit margins at important times of the fiscal year. Layoffs can lead to better earnings reports, which raises stock prices which means higher dividend payouts to major shareholders. Many executive bonuses are also tied to earnings, giving them a clear incentive to lay off lower-level employees in the event of poor earnings reports.
Many tech companies are responsible to venture capital funds who want to maximize performance in anticipation of a public offering or sale or private equity ownership that wants to drive profits. One way to do this? “Trim the fat” that’s dragging down the bottom line, and that extra weight is seen as being in the form of rank-and-file employees.
Why are tech layoffs not blanket indicators of the job market?
Tech isn’t the entire job market (and far from it!)
It’s never smart to generalize, especially in an area as massive and diverse as the U.S. job market. To reiterate, overall hiring increased and the unemployment rate actually dropped during the same period when the biggest tech companies were laying off tens of thousands of people.
Yes, the tech industry is big, and reporting on the actions of giants like Google, Amazon, and Microsoft is good for capturing clicks if you’re a website or news outlet. But they still represent a relatively small percentage of the overall workforce, let alone the tech workforce.
Even with significant job gains in the past few years, tech represents less than 10% of the overall workforce.
As of 2020, roughly 12.2 million people were employed in tech. In January 2023, the U.S. workforce was nearly 166 million people strong. Even with significant job gains in the past few years, tech represents less than 10% of the overall workforce.
Actions in the tech industry don’t necessarily signal problems in the overall economy. Plus, tech layoffs may be specific to a particular company or industry. Even within the tech sector, some companies may be thriving while others are struggling, and layoffs may be limited to the latter.
Trends over time
When looking at the job market, it’s important to take a holistic view that accounts for more than just the present. Even with the recent slew of tech layoffs, they don’t offset gains made since the COVID-19 pandemic.
The tech industry enjoyed significant growth during the pandemic as remote work became the new normal. While enormous companies got even bigger, layoffs are merely an indicator that these companies invested too heavily, too quickly, and couldn’t maintain profit scale.
Layoffs get offset in other areas
The tech industry is well known for its rapid pace of innovation and change, and layoffs may be a natural part of this process. The infinite growth mindset of today’s tech companies mean there’s theoretically no such thing as “too big.” So, even if an organization may be cutting jobs in one area, new jobs may be created in emerging fields or technologies.
The same is true from a geographic standpoint. While a company may be laying off workers in one department or location, it may be hiring in another. This means that the overall impact on the job market may be more limited than the layoffs themselves would suggest.
They sometime presage future success
Returning to that infinite growth mindset: Tech companies believe in growth above all else. Even if they layoff people now, it may be part of a larger strategy to reposition a company or industry for growth. While layoffs may be painful in the short term, they may ultimately result in a more competitive and dynamic job market in the coming months and years.
Ultimately, layoffs happen. It’s just part of the American economic system. Tech layoffs are not blanket indicators of the job market because they’re often specific to individual companies or industries, may be offset by hiring in other areas, and may be part of a larger process of change and innovation in the tech industry and elsewhere.
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