Currently, one of the hottest topics in the market is layoffs. Whether it is in the form of mass layoffs or several repeated rounds, employees are unsure of how long they will be holding their job. While the biggest layoffs came from high-profile companies such as Meta, Amazon, Microsoft, and Twitter, over 120 large companies including tech startups, major banks, manufactures, and online platforms, have conducted major rounds of layoffs last year and the wave continues this year. In the month of January alone, over 68,500 layoffs occurred from companies such as PayPal, Goldman Sachs, and Alphabet. The layoff wave has affected Maryland as well. In 2022, over 7,400 employees lost their jobs due to mass layoffs, and as of January 2023, 151 employees have already lost their jobs. As the mass layoff trend continues, uncertainty around job security has been growing. Experts are unpacking why this is happening and who is affected by this trend.
In a typical scenario, when a company’s profit start to decrease, the company has to find ways to reduce its costs. For many companies, laying off employees is the most efficient way to do so. Between 2019 and 2021, major tech companies’ employee growth went through the roof. Amazon’s employee count grew by 99 percent followed by Meta at 60 percent, to name a few. However, economic growth during the pandemic did not match post-pandemic growth due to higher interest rates, and inflation. This decreased the revenue per employee value.
Generally, tech companies use revenue per employee to measure investment value. For major companies, those values are set high, usually in hundreds of thousands of dollars, and when the value starts to go below the minimum, they start to reassess the number of employees. They end up laying off people in the pretense of saving company money, but they are losing millions of dollars in severance, benefit packages, and outplacement services fees. In fact, it is estimated that each laid-off employee costs firm 50 percent of the employee’s compensation and benefit even if other employees are performing those duties and 100 percent if the position is left open completely. Thus, laying off people with the excuse that tech companies are bearing loss seems inaccurate. Additionally, companies are forced to lay off employees when the country’s economic climate is struggling, also known as a recession. However, we are not in recession yet. As of January 2023, the national unemployment rate is low at 3.5 percent, gross domestic product is increasing, and less than 1 percent of the workforce are being laid off every month.
If it’s neither a recession, nor companies undergoing loss and filing for bankruptcy, there are two plausible reasons behind these waves of layoffs. First is automation. While Microsoft was laying off 10,000 employees, they announced their plan to invest $10 billion in Open AI. Google’s parent company, Alphabet, followed suit by reducing its global headcount by 6 percent, while investing their resources to develop their own AI, Bard, which has resulted in net losses for the company to date.
While conversations around AI replacing workers are increasing, it might be just what big companies are looking for. When 365 Data Science published a study to see who was affected by the 2022–2023 layoffs in tech industry, they found that the largest group of employees that got laid-off were not from tech jobs, but from human resources and talent sourcing jobs. With the hiring freeze and layoffs, it makes sense that HR employees are also losing jobs. However, HR is also a field where jobs can be replaced by automation. In fact, Amazon has used AI to find low-performing staff and fire them. After HR, the largest lay-off is from software engineering, which is also likely to be replaced by AI technology.
The second reason behind these layoffs is imitation. Jeffery Pfeffer, a professor at Stanford University, believes that some of the mass layoffs are resulting from copycat behavior, a term used to describe companies that are copying what others are doing to appease investors/stakeholders. This behavior has spread across many industries.
There might be numerous reasons motivating companies to partake in mass layoffs. However, this is concerning for many employees. A study published by 365 Data Science found that most workers who were laid-off were hired during the pandemic, and only about 10 percent have been able to find a new job since their job loss. What is surprising is that two-thirds of tech industry is comprised of men, but more than half of laid-off workers were women—56 percent. While this highlights gender imbalance and pay gaps, it also indicates that these layoffs might affect specific demographics more than others. As more accurate data starts to come to light, it would be interesting to see how these companies are planning these layoffs.