Tech jobs are vaporizing. Why does this happen?

Almost every major tech company is experiencing a series of layoffs, even though most are making good profits. Many people have never seen large layoffs like this, so the honest question is, why is this happening? Is fashion, fatigue or something more secular to blame? You can’t rule out fashion in a monkey-see, monkey-do way.

Since there is reasonable overlap between many tech companies, especially those that collect user data and sell it to advertisers, each will want to cut costs to stay competitive in the eyes of their shareholders. So you see companies cutting around 10% of their workforce – around 200,000 in tech so far – probably the least productive people.

But how did these people become so relatively unproductive? Two ways: gradually and all at once.

Many tech companies have been hiring big during the pandemic, assuming we’re moving towards new ways of working. For the most part, these hires received inadequate onboarding and leadership from distant bosses, and many were never made aware. This is the gradual part.

The all at once part came about when we decided the pandemic was over. Well, not really finished, but we had run out of patience to be patients – and we had to go back to the offices. We discovered that working from anywhere wasn’t all it was made out to be.

So while remote working is still ostensibly a possibility, management would like to see occupied cubicles in buildings they are paying big bucks not to occupy. If you’re out of the office for a long time, you’re useless.

Diffusion

However, I see a more secular explanation, and that’s fine. Every major invention has a few important parts. The first is the obvious inventive element, and the second is everything else, which scholars call diffusion.

Spreading a new idea in society is extremely expensive because it requires a lot of people to do the work. In the 19th century, the new transport and communication networks required many people to lay rails, stretch cables, build bridges, erect buildings and make ports accessible to large ships. It’s a long list, and it’s just one example.

The technological revolution of the 20th century also required significant infrastructure construction. Granted, companies were the ones laying the cables in their buildings, and other companies were building computers, routers, server farms, and eventually cloud infrastructure. But this construction was real, and it took decades.

The recent shift during the pandemic has had the marks of another spread, this time sending people back to their home offices. The industry hired a lot of time to support the construction. But then, halfway through, everyone said wait a minute. The current big layoff (to be associated with the Great Resignation) is partly a symptom of great indifference on the part of management.

We are not dealing with an inventory system, so the latest arrivals do not necessarily include all layoffs. Salespeople are presumably looking at the people best suited for the upcoming job in their layoff deliberations, and the outcome is what we’re seeing.

Recession

It’s an inexact science which you can see in the nice round numbers advertised by the suppliers. Part of the thinking will, of course, be about what a business sees happening in the coming months, and many are thinking of a recession.

However, there are recessions, and there are recessions.

Classic recessions occur when inventory builds up and businesses have to empty their warehouses at discounted prices. At those times, companies need fewer people making things to fill warehouses.

But the tech world isn’t looking at a classic recession scenario. Many make things that aren’t usually stocked; they are not tangible; these are services so the problem is demand reduction where more production capacity means turning a dial

The reason this is age-old is that companies need to reduce their production capacity. One way or another, many concluded that they had built their infrastructure as much as needed, at least for now.

Rent Seeking

Rather than growing exponentially, many are discovering what it means to grow organically – or at the same rate as population. Look at Facebook or its parent Meta for an example.

Facebook begins to falter; its robust user growth is peaking even as it makes more money. In the United States, it may lose users over 25. Its new augmented reality products haven’t captured the imagination of anyone not named Zuckerberg.

As I noted a few weeks ago, Apple hasn’t introduced anything genuinely new for several years. Now he’s getting into the publicity of a movement some economists call rent-seeking in which a company tries to make more money on existing investments (its data) than on new products.

Market saturation

In short, the secular slowdown is a big concern for technology and the economy. No, the technology is not going away; it is now woven into the fabric of our lives. But it has reached a saturation point where it faces strong commoditization and price pressure, and real growth is difficult.

Steelmaking was once in the same position as technology is today. In the 19th century, many products were made of steel, including railways and steamships, but also modern high-rise buildings and the new automobile.

We still use steel, and more than then to a considerable extent. But now everyone is making steel. It has been commoditized and the market is flooded with products, some of which sell for less than production costs.

Plus, other products like aluminum, plastics, and carbon fiber weigh less and are just as strong or better suited for purpose, so why not use them?

My two bits

I’m sure the technology is going in the same direction. It will take time, but the latest AI innovations that write passable prose and create weird but interesting imagery might speed the process.

Just as there was life after steel and the postal railways and all that 19th century stuff, there will be life after technology. It’s important to note that there are still plenty of tech jobs out there, so there’s no need to panic. Still, the latest round of layoffs is a cautionary tale.

What else can we do with what we know about technology? This is a question that we should all bear in mind.