Opinion : What is the reason behind tech companies’ employee layoffs?

Mass layoffs have been attributed to various factors, including over-hiring during the pandemic and rising interest rates.

In 2022, it is estimated that around 120,000 employees were laid off by tech companies due to factors such as sluggish growth, concerns about recession, and rising interest rates. The trend of layoffs persisted into January, with several major companies announcing their plans to cut their workforce. Amazon stated their intention to dismiss 18,000 employees, while Microsoft and Salesforce revealed plans to let go of 10,000 and 7,000 workers respectively. Google also announced that they would be laying off 12,000 employees across the globe.

According to Guy Michaels, an associate professor at the London School of Economics and Political Science (LSE), one of the reasons behind the recent downsizing in the technology sector is due to the excessive hiring that took place early in the pandemic. The demand for their products had surged at that time, but it later cooled down once the restrictions eased.

The technology sector had been performing well for a few years before the pandemic, and with more people working from home during the pandemic, certain companies in the sector had benefited from it. Consequently, their stock prices rose, and they decided to hire more workers, acquire other firms, and take on riskier investments.

According to Michael, the return to in-person interactions has not benefited technology companies as much as it has other sectors of the economy. Meanwhile, the recent conflict between Russia and Ukraine has caused commodity prices, particularly energy prices, to soar. Inflation has also led to higher interest rates, which have resulted in increased borrowing costs for tech companies, causing them to put off investing in startups and other long-term projects that would bring in profits in the future.

Due to their focus on future profits, technology firms are more negatively impacted by higher interest rates than firms that are already making profits. As a result, the current interest rate hikes may be decreasing the value of technology companies more than other types of businesses. The rise in interest rates, which is necessary to combat inflation, also depresses demand across the economy, affecting technology firms and other businesses alike.

Role of Investors

The professor emphasized that companies have various alternatives to layoffs for coping with the economic crisis, and mentioned the role of investors in this regard. He suggested that some technology firms are under pressure from investors who are concerned about declines in their stock market prices. While layoffs are a common response to cost-cutting pressures, forward-thinking companies can explore other options. Despite hiring at a slower rate than other major technology firms, Apple has managed to avoid significant layoffs thus far.

How Sellers Are Affected?

According to an expert, if technology companies lay off workers, it could have a ripple effect on their suppliers who specialize in selling to them. This reduced economic activity could also lead to cautious spending among laid-off or even employed technology workers, which could negatively impact the wider economy. However, the current recession doesn’t appear to be especially severe.

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Guy Michaels, an associate professor at the London School of Economics and Political Science (LSE),