Making sense of the mass layoffs in 2022

As of 15 December 2022, 223,647 people working in tech companies have been laid off, according to TrueUp’s tech layoff tracker. The number has already surpassed the Great Recession levels of 2008 -2009. Twitter, Meta, Amazon, booking.com, Cisco, Uber, Shopify, Coinbase, Stripe and Netflix are among the big names that downsized but the list has become longer and longer. In fact, as Q.ai puts it in a Forbes article, ‘it would probably be quicker to list the companies that haven’t laid off workers this year.’ What forces have been driving companies to arrive at this decision?

Layoffs to survive economic recession

The possibility of a full-scale economic recession has become more real approaching the second half of 2022. The companies justified their layoffs as cost cutting measures in view of the gloomy economic outlook. In the first email sent to all Twitter staff, Elon Musk said, ‘there is a good chance Twitter will not survive the upcoming economic downturn.’ Soon after the email was sent out, he sacked 50% of Twitter’s workforce. How exactly is the macroeconomy impacting the tech companies?

The inflation rate around the world rises to 40-year-high, obliging the Fed to increase interest rate. The effect is threefold. First, the inflation is eating up the revenue of the tech companies when their performances are measured in constant prices.  Second, the interest rate hikes supported the strong US dollars, which is hurting the profits of the tech companies as they usually operate internationally. Third, the increase in Fed rate disincentivised investments in the markets and had significantly lowered the amount of capital and liquidity in the markets.

Layoffs to fix over-hiring over the pandemic

While the harsh macroeconomic conditions are not exclusive to tech companies, many tech companies have over hired during the pandemic that made them more susceptible to large-scale layoffs.

The pandemic has changed the lives of many people. The remote work, remote learning, social distancing, online shopping had driven the tech companies to achieve exponential growth. Many tech leaders expected these practices or habits are going to stay after the pandemic and had gone overboard in hiring. Amazon doubled its workforce throughout the pandemic from 798,000 workers in 2019 to1.6 million in 2021, for example. In the past few years, Meta, Apple, Microsoft and Alphabet nearly doubled their combined number of full-time employees.

Layoffs as a social contagion

The mass layoff of one company sets the perfect stage for others to announce layoffs. Companies who are eager to prune the low performance workers will jump on this opportunity to get away with the backlashes. The decision to lay off people was not evidence-based but was simply a ‘copycat’ behavior, as Jeffrey Pfeffer, a Stanford scholar, puts it. What is worrying is that such contagion effect is spreading across all other industries. 

The fact shows us that some tech companies are still among the most profitable even though their growth had slowed down. For example, with a profit loss of 50%, Meta is still earning 4.39 billion U.S. dollars of net income in Q3 of 2022.

Although the number of open jobs at tech companies has downed 57.4 per cent from the peak in April, there are still 203,526 open jobs as of 9 December. The waves of layoffs could be viewed as a way for companies to trim their fat.

Layoffs as mismanagement

Tech companies are different. Layoff in one company should not justify layoffs in other companies. As a Lead Director of a tech company listed on the NYSE, Joanne Massey perceives layoffs as a sign of mismanagement – of growing too irresponsibly. Not many leaders were as honest as Stripe’s founders Patrick Collison and John Collison. In their email announcing the layoffs, they admitted that they had made ‘consequential mistakes’ in managing growth. 

In fact, Jeffrey Pfeffer warned that layoffs will not lead to productivity, despite what Elon Musk believed as he required those remained to sign a pledge to work ‘long hours at high intensity.’ Scientific studies suggested  mass layoffs increase workers’ mortality, lower the morale of the remained workforce, and are often very costly. They do not even solve the underlying problems that the companies are facing. 

Interestingly, layoff could be a mistake. It had made Bloomberg’s headline when Twitter had to ask some fired workers to go back. The management did not realise they had actually let go of the people that they need.

Layoff as culture reset

Working in tech sometimes means more than a job, it is an aspiration of our generation. According to ZipRecruiter’s job seeker confidence index, while only 4 percent of job-seeker most recently worked in the tech sector, 20 per cent of the job-seekers say they want to work in tech. 

Peter Kafka understands the layoffs as a natural process. The tech companies have matured and could not achieve the same growth rate as in their boom times in 2000s and 2010s. In those time, tech giants were giving out so many perks to lure the best talents but that was not sustainable when growth has slowed down. The downsizing coupled with perks withdrawal is actually a culture reset. Working in Silicon Valley may not emanate the same magic anymore.