Tech layoffs explained: is this a correction or a collapse?

There seems to be an unprecedented wave of layoffs ravaging the tech landscape. But are things really as bad as they seem? While each tech layoff can certainly be a disaster on a personal level, it doesn’t necessarily signal trouble on a big scale. Let’s take a cold hard look at if and how much trouble we are really in.

To get a full picture, we have to start from the beginning. Or from somewhere in the middle. So let’s go back to — you’ve guessed it — the coronavirus.

Events leading up to the tech layoffs

• In 2020, the pandemic happened. Surprisingly, this turned out to be a blessing in disguise for the tech sector. Social distancing and remote work put digitalization on fast forward. Many companies made big bets on how the coronavirus will change the world.
• In late 2020 and 2021, the tech sector was doing exceptionally well and saw the biggest annual revenue increases ever. Consequently, hiring was through the roof. Since the pandemic, the tech sector had added more office jobs than any other industry. 372,000 from February 2020 to February 2022 in the U.S. alone. This also ballooned the employees’ demands and companies' workforce expenses.
• Then life started going back to the old normal, more and more people went back to the office or school or out to eat, and demand for digital services began to decline. Not all new business ideas played out as hoped.
• In 2022, inflation and interest rates spiked. Was this because of the Russian military attack on Ukraine? Or is the economy taking its duly course, with nearly 15 years passed since the last recession? Who knows. But with the recent years’ track record, everyone buckled up for the unravelling of yet another “unprecedented” event. Rising interest rates dried up the tech companies’ access to easy capital and stock prices took severe hits.
• For some time, the tech sector continued full speed ahead. We had reports of tech hiring remaining consistently positive as recently as at the beginning of September 2022, despite the economic noise and other layoffs.
• Finally, in light of a looming recession, investors started to get antsy about profit margins. Tech companies needed to cut back on their expenses and scale back to a more reasonable level. One of the largest expenses in a tech company is the payroll — so this was the most obvious place to start.
• In November 2022, Meta laid off 11,000 employees. Soon, other tech companies including giants like Amazon, Google, and Microsoft followed suit.
• The layoffs reached their latest high in January 2023 with nearly 83,000 people laid off.
• With the latest news from Meta, hashtags like #layoffs2023 are trending again on LinkedIn and it seems everyone knows someone who’s been laid off. Are we all to be next?

The reason behind the layoffs

Long story short, there are many trends leading up to the layoffs. Tech companies were doing really well during the pandemic and also made big bets on the permanent changes it would bring to the way we live, eat, work, etc.

Not all of those bets paid off, but the tech sector was booming for a couple of years — we saw record profits as well as record hirings. This in turn raised the tech workers’ expectations. Life had never been better.

Post-pandemic reality looked a lot more like the old normal compared to what many companies had hoped for. At the same time, expenses increased due to inflation and money got a whole lot more scarce and expensive due to raising interest rates. The fintech industry was also rocked by scandals and cryptocurrencies took a steep downturn.

What can tech companies do? They need to let some air out from the bubble and cut costs. Layoffs are the obvious way to go, especially after salaries boomed hand in hand with hiring in recent years.

But why are they all doing it at once? When top tech companies started announcing layoffs, many probably followed suit just for the sake of it or being overly cautious. There’s probably at least some amount of herd mentality in action. Letting people go doesn’t necessarily increase revenue or profits, in some cases it can even decrease them further, not to mention the potential harm to future hiring.

What’s the verdict — is this a market correction or a collapse?

Indeed, more tech employees were laid off in 2022 than in 2020 and 2021 combined. And more people were laid off in January 2023 than in 2022 October, November, and December combined.

BUT… More than double the number of people have been hired in the past few years.

When you add up all the tech layoffs in the past 6 months, the total is about 180,000 people. Sounds horrendous. Until you consider that the number of tech office jobs increased by around 400,000 since the beginning of the pandemic. The difference is more than twofold.

Also, the tech companies still continue hiring — back on pre-covid levels. If anything, this looks more like a market correction waiting to happen.

Is this bad or good news for the investors?

Understandably, mass layoffs concern investors. And of course, no one can ever say with 100% certainty that this won’t snowball into a full fledge economic crisis. But for now, the cutbacks and layoffs look more like good news to the investors and the tech sector in general.

Critics say tech valuations were inflated for years, even before the 2020-2021 surge. This correction has brought tech and startup valuations to a more reasonable level that is more attractive for investors.

Layoffs have happened mostly in tech giants that were able to afford overhiring. As a result, the surging salary expectations are likely to stabilize. All in all, deflating that workforce bubble can be good news for smaller tech companies, with many happily welcoming newly-released employees. One company’s layoff is a brilliant recruiting opportunity for the other, after all…