Silicon Pink Slips: The Economic Impacts of Big Tech Layoffs
In late October, Jeff Bezos, executive chairman of Amazon and the world’s second-wealthiest person, warned his Twitter followers to “batten down the hatches” in the wake of increased economic turbulence. Just a few weeks later, Amazon announced that it would cut 10,000 jobs, the largest layoff in the company’s history amidst similar announcements from peer tech companies. What is driving tech companies to shed jobs? How will it affect the economy as a whole?
The Rise of Big Tech
Over the past decade, a group of companies collectively dubbed Big Tech have become the face of American economic prosperity. From humble origins in the 80s, 90s, and 2000s, companies such as Microsoft and Amazon have grown to become household names. Their trajectory was not entirely smooth. A precipitous decline in the prices of tech stocks in 2002 led to the collapse of many companies in the industry, but those that survived continued to grow. The companies that would make up Big Tech rode relatively smoothly through the economic turbulence of the Great Recession from 2007 to 2009; Google, for example, posted a profit of $1.35 billion in the third quarter of 2008.
In the following decade, these companies—and their market capitalizations—only grew. Google secured an effective monopoly in Internet searches, Amazon supplemented their dominance of e-commerce with a leading position in the cloud computing industry, and Microsoft’s desktop operating system remained market-leading. Apple broke a $1 trillion dollar market capitalization in 2018. Big Tech companies expanded into new industries like retail and autonomous driving, and new tech companies such as Spotify and Uber entered the fray.
The beginning of the COVID-19 pandemic proved to be a further boon for Big Tech. Work-from-home arrangements increased demand for many of these companies’ products and services, and the industry benefited from low interest rates set by the world’s central banks to encourage continued borrowing and lending amidst the accompanying economic downturn. Under these favorable conditions, stock prices climbed (the market capitalizations of Alphabet, Google’s parent company, and Amazon exceeded $1 trillion), and many tech companies increased hiring to keep up with new growth.
Choppy Waters
The smooth sailing for Big Tech would come to an end, however, with the beginning of 2022. With the lifting of lockdowns in many countries, the increased demand that buoyed Big Tech’s earnings had already begun to sink. Rising inflation, fuelled by the Russo-Ukrainian War, fragile supply chains, and the pandemic’s expansionary monetary policy, prompted a shift from a bull market of rising stock prices to a bear market of falling ones. Declining stock prices decreased the amount of money available to tech companies.
Compounding these issues are threats to many tech companies’ primary sources of revenue. For example, Amazon Web Services, the company’s cloud-computing arm, now faces competition from Microsoft Azure and Google Cloud. Decreased advertisement spending by businesses in the face of rising inflation poses a challenge to Google and Meta, whose primary sources of revenue come from ads. And of course, individual companies’ issues—from the management style of Twitter’s new boss to Mark Zuckerberg’s expensive bet on the metaverse—factored in as much as macroeconomic trends.
In the face of all these factors, Big Tech has now been forced to cut costs by reducing the size of their labor force, which they expanded during their pandemic boom. Aside from Amazon, Meta and Microsoft cut around 11,000 and 1,000 jobs, respectively. All told, the number of tech employees let go in 2022 is nearing 60,000, about the same as during the Great Recession. On a broader scale, however, the loss of jobs in Big Tech may not be as alarming as it seems. After all, tech employees make up only 3% of the total US labor force, and in October, the month before the layoff announcements, the US economy added 261,000 jobs. Thus, the firing of tech employees may not have an immediate outsized effect on the US economy.
Whatever their economic impacts, this round of layoffs is certainly a watershed moment for the tech giants. After having powered through economic downturns as new, rapidly growing enterprises, the realities of size are being driven home for them. For the average investor, evaluating tech companies on an individual basis is most likely the best strategy. If the company is established and of sound leadership, its relatively low-priced stock will likely realize a return once the current economic troubles subside. For the foreseeable future, however, rising inflation and hostile geopolitics are likely to continue. And independent of these macroeconomic events, the tech giants must also reckon with increased competition in markets they once dominated. Their successes—or failures—in navigating these stormy waters will determine the fate of one of America’s most vaunted industries.