Tech layoffs remain elevated despite improving economy

And don’t expect the mass layoffs to cease anytime soon, business experts say. While there’s a lot of buzz about artificial intelligence possibly eliminating jobs, other factors are likely prompting the ongoing cuts, such as the swelling of tech workforces during the pandemic, a kind of herd mentality among tech executives, stock market pressures and the investment climate.

Indeed, if the overriding factor driving the job cuts is an attempt to address what many now see as overhiring during the pandemic, “we still probably have a few more years of layoffs,” said J.P. Allen, a professor at the University of San Francisco’s School of Management.

When San Francisco’s tech companies and startups started shedding jobs en masse in mid-2022, those initial job cuts weren’t much of a surprise.

Many companies in the sector had bulked up their workforces in the go-go days immediately after the COVID–19 lockdowns, expecting the boom in tech demand sparked by the pandemic to keep going — only to be caught flat-footed when it didn’t.

Meanwhile, numerous signs pointed to economic trouble ahead. Inflation was spiking, and interest rates were rising in response. The stock market had fallen precipitously from its highs the previous fall. Venture firms were starting to curtail their investments, and many businesses and economic experts were beginning to worry about a recession.

Less than two years later, the economic situation looks dramatically different. The stock market has more than rebounded. Company finances have largely stabilized or improved. Inflation is down and interest rates have started to fall. And fears of a recession have receded.

But the tech sector continues to cut jobs in large numbers.

All told, in California’s Employment Development Department’s fiscal year to date, which began July 1, tech companies, startups and traditional companies cutting tech workers have laid off 3,215 people in San Francisco. That’s down from the same period in the previous year, when the tally was 5,719. But it’s well above the pace of the period immediately before the onset of the pandemic, much less the boom times of three years ago.

Many tech companies have said they’re cutting staff to invest in other areas or to streamline their operations. For example, when Instacart announced earlier this month that it would lay off 250 people companywide, CEO Fidji Simo described the move as a kind of trade-off for the company.

“This will allow us to reshape the company and flatten the organization so we can focus on our most promising initiatives that we believe will transform our company and industry over the long-term,” he said in a letter to shareholders.

Grammarly plans to focus on investing in artificial intelligence and restructuring its operations to encourage more collaboration, CEO Rahul Roy-Chowdhury said in an open letter to employees earlier this month. The decision by the provider of automated writing-assistance software to cut 230 total workers was made with those priorities in mind, he said.

“To arrive at [the layoff] decision, we took a look at our organizational design and the current skillsets of our teams through the lens of our company strategy,” he said in a letter earlier this month.

But some business experts think there’s more going on than just streamlining and shifts in strategy.

Many tech businesses and startups went on hiring binges in the wake of the pandemic. The work-from-home era that immediately followed the COVID-19 outbreak prompted a surge in usage and demand for a wide array of online and digital services or technology products, including everything from computers to online shopping to video conferencing. Tech companies big and small responded by hiring workers to meet the surging demand.

Roy-Chowdhury noted that before its layoffs, Grammarly’s workforce had grown from 200 to 1,000 people over the preceding five years. Salesforce’s employee base jumped from 49,000 in January 2020 to 79,390 three years later. Okta’s workforce soared from 2,248 to 6,013 over the same period.

But in many cases, the heady growth companies saw in the early days of the pandemic started to taper off — and their expenses started to catch up with them.

Salesforce, for example, saw its sales grow 24% from its 2021 to 2022 fiscal years, which ended Jan. 31. But its revenue growth fell to less than 15% in the first nine months of its most recent fiscal year. Meanwhile, the company saw its profit shrink from $4 billion in fiscal 2021 to just $208 million two years later.

In many cases, tech companies seemed to conclude that they overstaffed during the pandemic boom and needed to get their workforces back in line with what they would have been if not for that bubble, business experts said. Even with the mass layoffs last year, many are still well above their pre-pandemic staffing levels, they note.

“The economy has not entirely reverted to the pre-pandemic situation, but many of those special circumstances [seen during it] have kind of gone away,” said Alex Field, an economics professor at Santa Clara University. “So, it’s not completely surprising that there would be a reassessment of where they stood at this juncture.”

Another factor likely playing a role in the ongoing layoffs is tech leaders following the playbook of their peers. Alphabet and Meta’s announcements in late 2022 and early last year that they were laying off thousands of workers helped set the tone for the industry. Those moves gave permission to other companies to follow suit, experts say.

“As soon as it becomes OK for people to lay off (workers), then the floodgates are open and this is your big chance,” Allen said.

The fact that Wall Street often reacted to layoff announcements by boosting company stock prices has given tech leaders an even bigger incentive to unveil their own cuts. That dynamic has largely continued today.

“Rightly or wrongly, the stock market is rewarding this behavior,” Field said.

Another factor playing into the ongoing layoffs is the investment environment. While the stock market is up and inflation is down, interest rates remain relatively high.

During the post-pandemic boom, interest rates were near zero, making it easier for tech leaders to justify investing in risky initiatives that might offer much bigger payouts in the future.

But investors can now get a decent rate of return by just parking their money in a bank account, Allen said. That makes it much harder for tech leaders to argue in favor of investing in new projects or large workforces rather than returning money to shareholders, he said.

Meanwhile, venture investment in San Francisco startups stayed relatively flat last year after falling 42% the year before, according to data from PitchBook. With new funding harder to come by than before, startups have been forced to be frugal, Allen said.

Among venture investors, like tech leaders, there’s likely a herd dynamic going on, he said.

“If everyone else is not investing, then it’s kind of OK for them not to invest at the moment,” Allen said. “If everyone’s still sort of hiding under a rock, then it’s OK.”

The tech industry tends to be marked by marked booms and busts. An up period can go south quickly with just a change of sentiment. Similarly, the current down period, in terms of employment, will likely continue until sentiments in the industry and among investors change, experts said.

That may come from pressure on tech leaders to show that their companies are growing or to prevent being left behind by rivals, Allen said. They may feel forced to bulk up their staff and invest in new initiatives. Likewise, venture investors will likely feel the need to start putting the money they’ve used to work in startups with promising technology, such as artificial intelligence, he said.

“Once those (new technologies) appear, then the floodgates will open again,” Allen said. “Then everyone will be in a desperate race, and then we’ll go up to the boom cycle again.”