Why tech companies are laying off thousands of workers

Big tech companies have cut thousands of jobs since early 2024 as the rise of artificial intelligence (AI) and rising interest rates upend the tech industry.

Although the overall U.S. job market remains remarkably strong, tech companies have cut nearly 40,000 jobs in the first two months of 2024, according to Layoffs.fyi.

Just last week, Cisco announced plans to lay off about 4,250 employees, while PayPal announced about 2,500 job cuts last month.

Microsoft also announced it would lay off about 1,900 employees in its gaming division in late January, shortly after eBay announced about 1,000 layoffs.

“A lot of it is really the transition and spending on the AI ​​revolution, which is the biggest technology revolution we’ve seen since the beginning of the internet in 1995,” said Dan Ives, an analyst at Wedbush Securities. It’s a trend.”

The explosive growth of AI is likely a major factor in recent layoffs, experts told The Hill, as companies invest in developing innovative technologies.

“Product divisions…are experimenting with ways to incorporate AI into their business models, products, and features,” said Daniel Keum, an associate professor of business administration at Columbia Business School.

“That’s why they’re firing some of their non-AI developers and hiring new talent and people with AI expertise,” he continued. We are reorienting, prioritizing, and repositioning across the board. ”

Since the launch of the popular AI-powered ChatGPT tool in November 2022, tech companies have been racing to develop and release their own AI models and tools. Google released its AI chatbot Bard in February last year, and Meta released its open source model Llama 2 for research and commercial use in July.

The tech sector has also been hit hard by whiplash from years of near-zero interest rates and demand benefits from the coronavirus pandemic.

Julia Pollack, chief economist at ZipRecruiter, said the Federal Reserve has raised interest rates to 20-year highs over the past two years, posing a particular challenge for tech companies. That’s because tech companies are usually riskier investments.

“Investors can go elsewhere and get safer, higher returns. [they’re] “I’m not really keen on sitting around and waiting for experimental investments to pay off,” she said.

Pollack noted that rising interest rates will also strengthen the U.S. dollar, making it more difficult for tech companies to enter foreign markets.

“For most technology companies, international growth is the biggest opportunity, as they actually generate the majority of their revenue overseas,” she added. “Many high-tech companies are essentially saturating the U.S. market.”

Just a few years ago, Pollack said, technology companies were facing a “uniquely favorable financial environment,” when interest rates were hovering around 0% and people were using their cell phones during the pandemic. He said he was glued to his computer.

Jobs in technology industries grew at an average annual rate of about 4.5% from 2015 to 2019, according to data from the U.S. Bureau of Labor Statistics (BLS) analyzed by Pollack.

From April 2020 to April 2022, this rate jumped to about 7 percent as the country recovered from the pandemic.

“It made sense [tech companies] “We’ve grown like crazy during the pandemic, and that accelerated growth that probably would have been happening over a much longer period of time,” Pollack said.

Daniel Chao, chief economist at Glassdoor, described this as “pandemic overemployment.”

“There were a lot of companies in the tech industry that bet on pandemic-era trends that ultimately didn’t pay off,” Zhao told The Hill.

“Ultimately, if the economy turns out slower than expected and the pandemic trend doesn’t actually end, it’s not sustainable to grow the workforce as quickly as we’ve seen technology grow over the past few years.” I want to go,” he added.

Mr. Zhao suggested that recent job cuts in the industry are primarily a response to this trend.

“I think this year is still following the mantra you’ve heard: the year of efficiency.” [Meta CEO] Mark Zuckerberg’s spouse, the company is cutting its workforce after several years of very aggressive hiring, he said.

This explosion in tech jobs leveled off in 2022 and 2023, dropping to 6% and then 0.7%.

During this time, the industry made significant cuts. Tech companies cut more than 50,000 jobs in November 2022, nearly 90,000 in January 2023, followed by another 40,000 in February 2023.

Ives, like many economists, noted that many technology companies predicted a recession in 2023, but that did not materialize.

“Many technology companies entered 2023 expecting a hard landing and a Category 5 economic storm,” Ives said. “And when they came out from under the bed and looked out the window, the sun was shining.”

Rather, the US economy appears to be on a trajectory of what is called a soft landing. The inflation rate reached a 40-year high of 9.1% in June 2022, but has fallen to 3.1% as of January.

At the same time, the economy has remained surprisingly resilient, with unemployment remaining below 4% and job growth continuing to exceed expectations.

“I think this is a soft landing for Pillsbury Doughboy,” Ives added. “It’s hard to spot recessions unless you have a planetarium telescope.”

The Fed has held interest rates unchanged in recent months as inflation continues to approach the Fed’s 2% target, suggesting it may be ending its aggressive rate hike campaign and adding to optimism about a potential rate cut. is causing.

The stock market is “ahead of the curve” and has already “recovered significantly,” Pollack said, turning around the fortunes of many technology companies that have seen hiring return in recent months.

Ives said he believes the industry’s cuts are nearly complete and that we are in the early stages of a new bull market that will last until 2026.

“I believe there will be waves of mass hiring in the technology industry, especially in this soft and uncertain environment,” he said. “But a lot of that investment is growth initiatives, and a lot of it will be AI-related as the AI ​​revolution hits the tech industry.”