What caused tech layoff 2022–2024

After serving in tech for almost 20 years, I consider myself very lucky to have risen along the last decade of the booming cycle, surfed along the last lucrative wave, and experienced the downturn that started in 2022.

When the U.S. interest rates started rising in 2022 to combat high inflation, this had a massive effect on the tech layoffs that we saw from 2022–2024.

U.S. inflation started shooting up in 2022. The Federal Reserve raised the interest rate from 0.25% to 5.5% over a short period of time.

The rationale was that when interest rates are high, it will be more expensive to borrow money; hence, there will be less money circulating in the economy. When people are spending less money, inflation comes down.

Ideally, that’s how the macroeconomy finds equilibrium.

The problem with that was a lot of tech companies were operating and expanding through credit (borrowed money) instead of revenue from the business.

Obviously, the tech companies have an obligation to pay back the loans. When the interest rates got higher, it became expensive for the tech companies to pay them back.

It is also no longer financially feasible for tech companies to take up new credits because the interest rates got higher, which means it got a lot more expensive to take on a new loan.

After the interest rate hike, a lot of tech companies could no longer continue operating like how they used to since 2008, which was when the U.S. Federal Reserve (Fed) started Quantitative Easing to save the 2008 financial crisis.

From 2008 till 2021, the economy was flooded with credit liquidity.

It was relatively easy to get funding and inflated valuations for companies. Many private equity firms invested in tech companies.

The playbook was to achieve growth at all costs because the shareholders needed the valuation to grow and to trade the equity for a higher price.

Grow the market shares. Grow the revenue. Grow the number of products. Grow the headcount.

Tech companies had to grow even at the cost of borrowing more money.

It was the rational thing to do because the capital market was rewarding companies that showed growth. Not to mention the market was flooded with credit liquidity. Why leave the money on the table?

That was when the tech companies were raining money.

The tech workers’ salaries were inflated quickly because every tech company wanted to grow, and they needed tech workers to materialize the growth.

The tech companies were competing for the limited pool of tech talents; hence, the salary was rapidly inflated to attract the tech talents.

Tech workers started getting double-digit salary adjustments. A promotion every 1–2 years was common. Job hopping yielded 20–30% increments easily.

The industry has created a highly inflated salary among tech workers.

To put salary into perspective, a senior engineer in tech can be making the type of salary that a director or VP will be making in other industries.

The compensation got so lucrative that folks outside of the tech industry started taking short courses and bootcamps to join the tech industry. There was also no shortage of folks who did not have a computer science background that got involved in tech with non-technical roles.

The party went on until COVID-19 hit.

In the early part of 2020, companies were afraid of a potential economic downturn. Hiring, promotions, and bonuses were frozen. Some layoffs and furloughs started to take place for a short period of time.

But soon, the market realized COVID-19 had a significant positive impact on tech businesses instead of a negative one.

The need for technology skyrocketed due to the need to conduct business virtually. Tech companies continued to blossom because it was one of the most promising businesses for the world to invest in during the COVID period.

Tech companies doubled down and went on a hiring spree to bring in more tech workers for growth.

At the same time (COVID), governments around the world released stimulus packages to ensure their respective countries’ economies did not go into recession due to COVID lockdowns.

Now, not only was the tech industry flooded with cheap credit, but the economy was also flooded by newly injected liquidity from the governments.

The consequence: high inflation.

The bad news is, high inflation destabilizes the economy. The U.S. Fed started raising interest rates in 2022 to try bringing the inflation down.

It has been effective to a certain extent, but raising the interest rate has a blanket effect all over the entire economy, which leads us back to the expensive loans (high interest rates) to be paid by the tech companies.

The theme for tech companies has moved from growth to 1) survivability for startups and 2) profitability for enterprises.

Companies need to survive and continue to thrive on their own revenue without the cheap credit of the past.

What we have today in the tech industry is the obsession with profitability.

Putting aside the accounting mumbo jumbo, the equation is fairly simple:

Profitability = revenue — expenses

Companies need to either increase the revenue or reduce the expenses to achieve profitability.

In the short term, there will always be a limit on how much revenue can be increased without incurring additional costs. However, it is relatively easier to reduce expenses in the short term with minimal impact.

Like it or not, the biggest expense for most companies is staffing (i.e., employees’ salaries).

Hence, the layoffs.

In the beginning, low-performing individual contributors were targeted.

Then, there was a constant push for the managers to raise the bar for performance evaluation to identify more low performers.

Next, the managers themselves are on the list.

During the same period, Elon Musk bought Twitter (rebranded to X) and cut 80% of the team size to prove to the world that they didn’t need that many expensive engineers in the company to keep the platform running.

Lots of non-revenue generating projects were dropped, and the remaining employees took on additional responsibilities, working extra hours.

CEOs around the world thought that was brilliant and secretly admired the move.

Also during the same period, ChatGPT (and other LLMs) was released, and the world believes GenAI will significantly reduce the need for tech workers and some other white-collar jobs.

Hence, more layoffs.

Reducing staffing costs, removing redundancy, combining roles, shutting down product lines, just to name a few, are the efforts companies try to improve profit margins.

In other words, everyone is expected to do more with less.

Tech companies around the world are pushing hard to get more productivity out of their employees in order to not only achieve but to further optimize profitability.

Layoffs have been happening for the last 3 years. Are we getting to the end of the tunnel?

Unfortunately, I have a pessimistic perspective in the near to mid-term future.

By mid-2024, we are still hearing about layoffs from the big techs.

Hiring is hard to come by. If there is an opening, the candidates go through a lot more scrutiny in the interview process. Companies are looking for unicorns who can wear multiple hats instead of just someone good enough to do the job.

Like it or not, executives have very little interest in hiring and to some extent will make hiring challenging.

The staffing expenses are regularly scrutinized. It is not uncommon to need a CFO or CEO to sign off any new hire even for junior roles.

Promotions are hard to come by. Many promotions are frozen due to budget constraints. If it happens, it goes through extremely stringent criteria.

There is very little room for leadership roles, because organizations want to have workers on the ground working instead of managers counted as overhead, sometimes negatively viewed as manager managing managers which is unproductive.

Profitability and artificial intelligence are the themes in earning calls. Public companies are rewarded with rising share prices only if they meet earning targets and having AI in their future plans.

Tech companies are reverting back to the fundamentals to ensure the business makes a profit and continue making better profit.

Unless companies cut till it hurts the profitability, layoffs will continue to happen to improve margin.

In the next article, I will offer 5 things you can do to significantly reduce your risk from layoff. Stay tuned.