The News: Last week the U.S. Bureau of Labor Statistics reported that total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate edged down to 3.5 percent. Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance. What then, is the reason for so many tech sector layoffs? Read the full Press Release from the Bureau of Labor Statistics here.
Labor Department Data Points to Solid Hiring — What’s the Deal with Tech Sector Layoffs and What Does the Future Hold for Those Affected?
Analyst Take: Economists highly anticipated the December U.S. Bureau of Labor Statistics report, as they looked to this data to indicate whether the recent Fed rate hikes had the desired impact or if inflationary pressure would continue to escalate. The report stated that wages grew by 0.3% in December, slightly less than expected and down from 0.4% a month earlier, signaling that wage growth has slowed somewhat. This was good news for the economists.
The slowing but steady monthly growth in new jobs, resulted in a slight decrease in the unemployment rate to 3.5%.
While that’s interesting, I’m more interested in why there is so much news of layoffs in the technology sector. This seems to fly in the face of the recent headline news of large tech firms such as Salesforce (8,000 layoffs), Microsoft (1,000), Cisco (4,000), Meta (11,000), and Amazon (18,000), all announcing sizable reductions in their workforce. According to data from TrueUp, in 2022, there were 1,517 layoffs at tech companies, with 237,874 people impacted.
My take on this is that the tech industry was driven into a hiring spree to support the abnormal increase in business caused by the pandemic. However, with that growth engine subsiding and economic headwinds increasing, this sector is now bloated and can no longer support these employment levels.
Work-From-Home Resulted in Increased Online Activity And Food Ordered For Delivery
The one thing the pandemic did was quickly and efficiently move consumer spending from traditional in-person modalities to online transactions. This quickly thwarted revenue for the arts, entertainment, and recreation sectors, especially those with an in-person services element. People turned to streaming services like Netflix and Disney+ for entertainment and became more comfortable with online shopping from Amazon, Walmart, and even their local grocery stores.
Similarly, the pandemic also increased the need for the enablement of remote workers. As offices became quiet, workers needed video communications, collaboration platforms, and online customer management tools to keep the wheels of their business moving. Microsoft, Cisco, and Salesforce stepped up development efforts to meet this considerable surge in need and quickly captured this new business spending.
But, with the end of the pandemic, these growth engines became liabilities that needed to be corrected.
Immigration Policies Created a Vacuum Within In Services Sector
The pandemic timeline also coincided with tighter immigration policies, resulting in many services and entry-level employees leaving the U.S. job market in 2020 and 2021. The impact of lost employees was experienced but mitigated due to constriction from a lack of in-person customers. But, as the pandemic subsided and people began to return to public places, the services industries found themselves without employees to support what was dubbed the “pandemic-revenge” surge.
The worker vacuum was vast, and the services industry used all of 2022 to reclaim employees. Their hiring frenzy was a fundamental reason the U.S. job market exhibited steady numbers throughout the year.
Headwinds For the Economy Hit Tech Sector Exceptionally Hard
Returning our attention to the tech sector, the pandemic created rosy projections of exceptional growth that did not pan out post-pandemic. Yes, many tech businesses achieved new recurring revenue levels and increased their installed customer base. Still, it was impossible to maintain the exceptional growth rates that catapulted them to these new revenue levels. The growth engine was winding down, and Wall Street took note. Many publicly traded tech companies saw their stock price deflate as growth rates returned to pre-pandemic levels.
But things continue to worsen for the battered Big Tech sector. Inflationary pressure in the economy has increased the cost of capital, not only putting additional downward pressure on stock prices but also impacting the cost of maintaining the current operating cost levels within many of these companies. For these organizations, real estate, capital expenditures, and employee count were prime areas for reduction as interest rates soared and growth rates continue to stumble.
Even the V.C. Market Reflects Similar Need for Better Return for Capital
These market forces have also impacted private equity and venture capital as funding sources for tech start-ups and private companies.
According to a report by Pitchbook and the National Venture Capital Association (NVCA), the deal count in 2022 for the full year was 15,852, down 14% from 18,521 in 2021, and the deal value was $238.3 billion, down 30% from $344.7 billion a year in 2021.
Likewise, 2022 U.S. V.C. exit activity was 1,208 deals valued at $71.4 billion, down dramatically from 1,925 deals valued at $753.2 billion a year earlier.
Looking Ahead to the Tech Industry Challenges
With the scenario described above, I expect 2023 will not be an easy year for the tech sector. Yes, there will be some winners, but there will continue to be many highly visible misses in this arena.
I expect companies with a solid recurring revenue stream and marginal-to-positive growth to ride out the inflationary cost of capital and depressed stock values. Private companies that can afford to self-fund during these costly times will likely also weather well, but startups that require capital to grow will be hindered for the next 12 to 18 months.
I expect that IT spending will be cautious, but still justified by many enterprises. This is especially true for products and services that support ongoing business continuity objectives such as remote collaboration, video conferencing, and SaaS services such as Contact Center as-a-service that can be easily scaled or retracted as needed by enterprises.
As far as tech employees recently out of work go, many will find themselves in new, unfamiliar territories. Some may take chances on startup opportunities, offering their skills at a discount with their eye on the long payout when the market is favorable to these entities. Back to a world of options and stock incentives, perhaps? Others will find work in other areas, and I look for other tech-savvy workers to migrate from traditional tech employers to key roles in non-techy services, leisure & hospitality, and healthcare companies. The good news is that these tech industry refugees will bring their business savvy and technical skills to these sectors, creating a possible boom in innovations for these industries.
Don’t be surprised if, over time, the redistribution of talent could have a net positive effect.
We can then look back and say, “Adam Smith’s ‘invisible hand’ does it again.”
Disclosure: Wainhouse Research, part of The Futurum Group family of companies, is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of Wainhouse Research as a whole.
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The original version of this article was first published on Wainhouse Research.
Author Information
Craig holds a Master of Business Administration from the Texas McCombs School of Business as well as a Bachelor of Science in Business Administration from Tulane University.
