Tech layoffs may just be the beginning

The size and speed of tech layoffs surprised many. Twitter has shed nearly 50% of its workforce while 2022 has witnessed nearly 130,000 tech job firings from FAANGS mainly. But other names like Airbnb, Uber, Getir, Snap, etc. have also broadly joined the firing party. Meta (ex Facebook) leads the league table with 11k firings followed by Twitter at nearly 4k. Amazon is also reportedly preparing to fire nearly 10,000 employees.

It may be important to first reflect on why this is happening when US labor market is at its tightest ever. Tech companies have hired massively during COVID online boom both as response to surging online demand and also in anticipation of this demand continuing. While they were right about the first aspect, they may have gone wrong on the second aspect. The moment COVID was off the table and companies have started forcing employees back to office, online demand dropped significantly making these “surge recruitments” redundant. Hence, as they say what goes up should come down, what was hired with speed and size should taper off at some point.

The fact that these layoffs are happening at a time when otherwise we have a tight labor market is noteworthy. While the tight labor market will eventually cool down in response to recession, tech layoffs may also cool down but we will see layoffs spreading to other sectors as a fallout of recession. The size and speed of layoffs in other sectors will be a function of how long and how deep the recession is supposed to be. That is something we cannot guess at this point in time. However, recession is bound to bring revenues and earnings down and with it the margins. Social media giants will face a drop in advertisement revenues as companies will struggle with consumer demand especially discretionary spending.

It is also pertinent to ask why layoffs have stated with tech companies and not other sectors. The simple reasoning could be the increasing cost of capital. Almost zero cost of capital before COVID for a decade have made obtaining finance a kids play. I am not sure if it led to efficient capital allocation. It is natural that when money is available aplenty and at a low cost, bad project decisions are very much a natural occurrence than a rarity. In that scenario, when cost of capital started increasing that too swiftly, tech companies were the first to be affected being the prime beneficiary of low cost of capital before. Also, the low cost of capital enabled these tech companies to have juicy valuations which also came down (Meta is down 75% from its peak). While tech companies faced business pressures (due to lower revenues), they also faced stock market pressure for this reason.

Going forward, we see that tech layoffs can at best be a beginning of a problem and not the end. As recession sets in, we will see layoffs spreading to other sectors that might actually help lowering wage growth and therefore inflation, an outcome Fed wants very badly. However, tech layoffs need not be all doom and gloom for these companies, especially FAANGS. Many of them are market leaders and market shapers and in a sense too big to fail. It will be good if they take this layoff opportunity to trim their business approach and avoid committing hiring errors like how they did during COVID. If they learn and move on, it may actually be a good news.

From employee’s perspective, in as much as they enjoyed all the attention and wage growth during the surge recruitments, they may now find it very difficult when almost all of them are trimming their workforce. Mass scale layoffs can accelerate the return of employees back to office and may also boost productivity due to competition. In the meantime, techies should ride the bumpy road for a while.