Tech sector layoffs explained: What you need to know

Economic downturn

Debates of a U.S. recession started when data from the U.S. Bureau of Economic Analysis showed a shrinking economy in July 2022 for the second straight quarter. Economists are unsure, and the fear of a recession still looms in news reports. Other conditions threaten the economy's health, such as the government debt ceiling, the war in Ukraine, the ongoing pandemic and the rise in interest rates.

Companies turn to layoffs as a survival method to cut costs when revenue and profits get leaner.

Inflation

When inflation hit the economy hard in June 2022, consumers saw price increases of 9.1% compared to the typical annual rate of 2% for steady inflation, according to the Federal Reserve. 2022 saw the highest inflation rate in 40 years, according to the U.S. Bureau of Labor Statistics (BLS). The economy softened as people started buying less to accommodate these higher prices. The cost of living jumped significantly, and people and businesses had to make cutbacks. Technology companies saw price increases for services, so companies had to evaluate and make cuts if necessary.

Businesses look 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. Tech companies lose revenue when businesses cut back advertising. Tech companies, such as Meta, Google, Instagram, Snap and ByteDance, have business models that rely on selling ads.

Higher interest rates

The Federal Reserve raised the interest rates seven times in 2022 and may raise them more in 2023. The Fed raises these rates to slow economic growth and deter both consumers and businesses from spending, which reduces demand to ultimately lower prices.

Higher interest rates affect how much a company wants to borrow due to higher costs. These higher rates directly impact venture capitalists (VCs) and other funding of startups. Companies do not want to invest in riskier areas when the economy's future is uncertain. Economic uncertainties cause companies to reevaluate their hiring and growth strategies.

Investor pressure

Investors want companies to decrease expenses as revenues slow down. VCs are worried that profits will be down this year after the large growth period. For example, TCI Fund Management called on Alphabet, Google's parent company, to reduce head count and take action for improved profitability. Other big tech companies, such as Meta and Microsoft, also faced backlash from investors, saying their head count was too high compared to other companies.

Overhiring during the pandemic

Part of the rise in layoffs is due to correcting the hiring of too many people. During the height of the pandemic, the use of technology grew significantly as everything moved online. People were working remotely, shopping online, ordering groceries to be picked up or delivered, streaming movies at home and taking classes online instead of in person. Many were under quarantine and encouraged to stay home, so people spent more time online.

The surge in online activity brought tech companies record-level profits and started a hiring frenzy to keep up with the demand. Tech companies thought this would be the new normal, expanding their teams and growing quickly.

Meta nearly doubled its employee head count. In March 2020, Meta reported 48,268 staffers and more than 80,000 by September 2022. In November 2022, the company announced it was laying off 11,000 employees.

Now, some work is shifting back to the ways before the pandemic. If people are doing hybrid work schedules, people aren't using tech as much as they were when working from home full time. Instead, they are spending time going into stores, traveling, attending sporting events, going to concerts and dining at restaurants. With the lower demand for tech services, the need for these new hires also decreased.

Post-pandemic reality

Many workers hired during the pandemic were not entry-level employees, but experienced software engineers and developers earning salaries in the six figures with generous benefits. Companies are facing too many employees with redundancy and overstaffing. Companies had high hopes to continue this rate of growth. However, as restrictions lifted, people returned to pre-pandemic lifestyles. With the return to previous work environments, big tech companies are removing the extra layer of employees hired during the height of the pandemic.

Technology for working from home, such as Google Meet, Microsoft Teams and Zoom, are still being used but with lowered numbers since every meeting is no longer only online. Several workers are returning to the office for collaboration and sharing ideas.

Mature industry

The tech layoffs may also be a result of the industry maturing or becoming more stable after rapid growth. Tech companies may not be on pace to acquire as many new customers since many people have already adopted their services. Instead, tech companies may be looking beyond growth and into diversifying products or expanding globally.

Will layoffs spread into other industries?

The U.S. tech industry accounts for about 8.9 million people in the total workforce, according to CompTIA 's "State of the Tech Workforce" report. Even though there have been several layoffs in the tech and media industries, other labor markets have been steady.

The U.S. unemployment rate fell in December 2022 from 3.7% to 3.5%. This is a 50-year low, according to BLS.

Large tech companies make the news with large cuts, but some smaller and midsize companies are still hiring tech workers, according to BLS.