Meta announced in November 2022 the historic layoff of some 11,000 employees—13% of its workforce. That same month Twitter did the same with some 3,700 workers, and in early January 2023, Amazon said it planned to slash more than 18,000 jobs. Numerous tech giants such as Netflix, Alphabet and Microsoft have put a freeze on hiring and made massive layoffs in recent months. We analyse this complex situation and its impact on both companies and their employees.
Layoffs spill over from one company to another
In 2022, hiring at technology companies in many countries slowed down compared to 2021 and layoffs skyrocketed. In the US alone, more than 91,000 workers in the tech sector were laid off in 2022, according to a tally by Crunchbase. "The layoffs that are happening seem to be, not in all cases, but in some cases, corrections to that excess behaviour which has occurred over the last couple of years while money has been cheap and easy," Richard Mabey, CEO of contract automation platform Juro, tells Business Insider. Mark Zuckerberg, the CEO of Meta, has conceded that he was wrong to assume that business growth would continue at the pace achieved during the pandemic, when the tech giants' earnings went through the roof.
While some experts blame the layoffs on the large number of hirings in recent years and uncertainty in the face of the economic downturn, others believe there are other reasons. One such expert is Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business, who says: "Could there be a tech recession? Yes. Was there a bubble in valuations? Absolutely. Did Meta over-hire? Probably. But is that why they are laying people off? Of course not. Meta has plenty of money. These companies are all making money."
According to the expert, the massive downsizing is mainly the result of "social contagion". "Layoffs are the result of imitative behaviour and are not particularly evidence-based," he says. There are some examples of past mass layoffs. After the terrorist attacks of 11 September 2001, according to Pfeffer, every airline did layoffs except Southwest. By the end of that year, Southwest "gained market share."
Large hiring efforts in recent years and the economic downturn have led to massive layoffs. Credit: Wall Street Journal.
Reputational damage, stress and other consequences
With this move, investment in future technology is being cut. Mabey believes that eliminating equipment can lead to slow growth in certain areas, which would negatively affect future earnings. "Short-term cash savings, medium-term pain," he says. Pfeffer agrees that layoffs can be counterproductive: "Layoffs do not solve the underlying problem, which is often an ineffective strategy, a loss of market share, or too little revenue. Layoffs are basically a bad decision."
Moreover, by doing so, companies are sending a message that has an impact on their image and reputation: "Employees and people looking for jobs remember how organisations acted during the economic downturn," Danny Allan, chief technology officer at software firm Veeam, tells Business Insider. Mabey agrees that when a company makes a major cut in its workforce it is sending a message to its employees, who "have long memories": "We care more about money than we care about you."
The stress created by layoffs has a devastating effect on employee health and substantially increases mortality and morbidity, says Pfeffer. Research indicates that involuntary job loss is associated with an increased likelihood of suicide and attempted suicide.
The stress created by layoffs has a devastating effect on employee health. Credit: NBC News
Alternative solutions to avoid layoffs
But if layoffs sometimes don't work, what would be the best solution for these companies? Pfeffer gives the example of Lincoln Electric, a well-known manufacturer of arc welding equipment, which, instead of laying off 10% of its workforce, made everyone take a 10% pay cut, except for senior management, who took a larger cut. "So instead of giving 100% of the pain to 10% of the people, they gave 100% of the people 10% of the pain," he says.
We will have to wait a few months to see the consequences of these massive layoffs play out. For the time being, Pfeffer does not rule out that they will spread to other sectors. In fact, he says, it is already happening: "Retailers are pre-emptively laying off staff, even as final demand remains uncertain." In the event that layoffs are unavoidable, the best course of action for the company would be to help employees as much as possible and to be honest, says Allan: "Giving your employees confidence and clarity about what the future holds for you as a company is probably the best thing they can do during challenging economic times."
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