Why are tech companies laying off workers?

ISTANBUL

Tech companies laid off an estimated 120,000 workers in 2022 due to slowing growth, interest rate hikes, and recession fears.

The wave continued in January, with Amazon announcing plans to sack 18,000 people and Microsoft and Salesforce saying they will dismiss 10,000 and 7,000 workers, respectively. Google, meanwhile, said it will lay off 12,000 employees globally.

The downsizings are also because of over-hiring early in the pandemic amid a surge in demand for their products, which cooled once the restrictions eased.

"First, the technology sector was doing well for several years. And during the pandemic, more people worked from home, which also benefitted some firms. So their stock prices increased and they hired workers, acquired other firms, and took on riskier investments," Guy Michaels, an associate professor at the London School of Economics and Political Science (LSE), told Anadolu in an email interview.

"The return to face-to-face interactions has not been as good for technology firms as for other sectors of the economy," he said.

But as the pandemic eased, Russia launched a war on Ukraine, leading to soaring commodity prices, particularly energy.

Higher interest rates to rein in inflation increased borrowing costs, shelving tech investments in startups and moonshot projects – profits from which are expected in the long term.

"So higher interest rates affect them more negatively than firms that are already making profits today. As a result, the interest rate increases that we are seeing may be reducing the value of technology firms more than that of other firms," Michael said.

"The increase in interest rates, which is needed to fight rising inflation, depresses demand in the economy more broadly, and this affects technology firms along with most other firms."

The US Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, the eighth increase since March 2022, bringing the federal funds to a range of 4.5% to 4.75%, up from almost zero.

Michaels noted that the overall slowdown in economic activity and fears of a recession had reduced the demand for services provided by technology firms, leading them to do less profitable activities and lay off workers.

Role of investors

On various solutions that companies can seek to overcome the economic crisis instead of laying off their staff, the professor highlighted the role of investors.

"I think some of the pressure on technology firms comes from investors, who worry about the declines in their stock market prices," he said. "Forward-looking firms do not have to respond by laying off workers, but they are often pressured to cut costs, so layoffs are a common response. But not all technology firms have made mass layoffs."

"Apple, which was hiring at a slower rate than other large technology firms in recent years, has so far avoided large-scale layoffs," Michaels added.

Effect on sellers

On the possibility of layoffs spreading across industries, he said tech companies' suppliers would be affected negatively.

"Reduced economic activity in technology firms can negatively affect their suppliers – especially those who specialize in selling to them," he said.

"And the wider economy may be negatively affected if laid-off technology workers – or even some who are still employed – are more cautious in their spending. But for now, at least, it does not seem like the recession is particularly severe."