Technical layoffs and hiring slowdown stand out in an overheated labor market

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US employers added more jobs than expected in April amid a tight labor market, the Bureau of Labor Statistics reported Friday.

But the tech sector, which has thrived during the pandemic, is showing signs of contraction.

Facebook’s parent company Meta has paused hiring and scaled back some hiring plans, Insider reported last week based on an internal memo it reviewed. “We are regularly reassessing our talent pipeline according to our business needs and in light of the expenditure guidance provided for this earnings period, we are slowing its growth accordingly,” a spokesperson confirmed to CNBC.

Amazon’s chief financial officer told analysts on the company’s earnings call that its warehouses have become “overstaffed,” after a massive hiring wave during widespread shutdowns pushed consumers more and more to shop online.

It’s not just the biggest tech companies.

The Uber CEO told employees in a letter obtained by CNBC that the company will “treat hiring as a privilege and will be thoughtful about when and where to add headcount,” adding, “We’ll be tougher about costs across the board.”

Retail brokerage Robinhood recently said it was laying off about 9% of full-time employees to get rid of cross-functional positions after a massive hiring spree. Peloton announced earlier this year that it would reduce the company’s workforce by about 20% as part of a cost-cutting measure. Startups such as the popular video app Cameo recently announced a round of layoffs of nearly a quarter of their employees, The Information first reported.

The cuts are in stark contrast to the rest of the economy, where job seekers still have great bargaining power and employers grapple with rising labor costs amid inflation and a wave of resignations. In April, job growth in leisure and hospitality led the way, with 78,000, indicating a return in demand for pre-pandemic activities.

According to experts, the factors affecting the tech industry are unique to a sector that has grown at a rapid pace throughout the pandemic, and do not necessarily indicate a broader slowdown. While some of the pressure may also come from macroeconomic trends that could emerge later in other industries, many economists expect a tight labor market to be here for some time thanks to an aging US population and other factors.

Inflation and other macro factors

It can be difficult to track trends in the tech sector in employment data due to different business models within the industry, from stocking at Amazon to advertising on Facebook. But looking at the information sector reported by the Bureau of Labor Statistics, Vineta Dimitrova, chief US economist at Ned Davis Research, said, “There does not appear to be any leading trend from the industry for overall employment growth.”

However, inflation may be a factor in technology employment, just as it hits other sectors of the economy.

A company like Amazon is a leader, said Terry Kramer, associate professor at UCLA’s School of Management.

“Inflation is 8%, economic growth is slowing now, and people are not buying as much,” Kramer said. “And so, for me, it is more of the Amazon story, where in e-commerce, and their primary platform, people are more careful about what they buy. Because based on the rate of inflation, there are fewer dollars available to be spent by consumers.”

For a company like Amazon, inflation means that the company’s costs will rise. “If consumption of their products and services does not rise to the same degree, it could erode their margins,” explained Agron Nikage, associate economist at the Conference Board. “So they are forced to slow down their growth.”

But the slowdown in other companies may be more specific to their business. For example, Kramer attributed the Meta hiring freeze in part to Apple’s iPhone privacy changes, which hurt Meta’s ability to target ads.

snapback after the pandemic

The technology sector was one of the biggest beneficiaries of behavioral shifts at the height of the pandemic. With offices closed and people spending more time at home, investors have flocked to so-called home stocks such as Peloton, Zoom and Netflix.

As people return to the office, travel and eat out, many of these companies have had to readjust.

“When the pandemic hit, it was basically a preferential shock,” said Daniel Maninkov, an economic forecasting expert at the University of Michigan. As these preferences changed, he added, the government stepped in to help businesses as demand suddenly hit a wall.

Now, the cycle is reversed, but without government help.

“Now that we’ve gone through a reverse shock, there’s no help from the government, but it’s still a preference shock,” Manaynkov said. “So it’s likely to be somewhat painful for the sector that has benefited from the pandemic. But also for the people who were employed there because they wouldn’t get generous unemployment.”

If layoffs in the tech sector become more common, Maninkov said, it could have implications for the broader economy. Without government stimulus, laid-off tech workers may reduce their discretionary spending, which could contribute to a broader market slowdown.

But Nikage said some big tech companies have already expanded their hiring to different parts of the country, which may indicate they are still feeling the impact of the narrow market for talent.

Zooming out to the wider economy, it appears that job security for workers is very stable at the moment.

“This is probably the safest time to hold your job right now because the job market is so tight,” Nikaj said.

Rebalancing the Venture Capital Portfolio

The hiring slowdown among venture-backed startups may be a result of the so-called “divider effect,” according to Mark Peter Davis, managing partner at New York-based investment and incubator Interplay.

It starts with large institutional investors who own a mix of assets, including public equity and venture capital. If the value of publicly traded stocks drops significantly, these investors will suddenly find themselves with a relatively larger proportion of their portfolio in venture capital and will have to rebalance by reining in new venture capital investments.

As a result, institutional investors may begin to step back from venture capital funding to rebalance their portfolios. This can spread through the startup financing landscape, forcing companies to reduce their cash burn — in some cases, this means layoffs.

Martin Bechenson is the co-chair of Sherwood Partners, a Silicon Valley company that helps restructure or wind down startups. He said his work has remained largely consistent after a briefly slower period that extended into parts of 2020 and 2021. He attributes this slower time to the proliferation of government paycheck protection program loans that essentially gave some small businesses an extra runway. But since then, he’s seen the business improve again.

The consistency of his business, he said, is largely due to the venture capital model, which hinges on making big bets, and anticipating that many will eventually fail. This is especially true now that IPOs have stalled, making it more difficult for startups to get out and give investors a return on their money.

From overgrowth to active growth

Kramer noted that slowing technology employment does not mean the industry has stopped growing.

“People have to look at how much they have grown in the last, two, three, four years because of Covid,” Kramer said. “If they’re growing at 30, 40% and then down to zero to 5% growth, they’re still growing and they’ve already hired a lot of people.”

Two executives of the hiring platform said they still see a commitment to hiring by tech companies, but the overall approach has changed.

Jerome Tiernink, CEO of talent acquisition platform SmartRecruiters, described it as a shift from “growth at any cost to efficient growth.”

“Investors have made it clear that now is the time for tech to continue to grow, but that money is not free anymore,” Ternynck said, noting that valuations in the public market are declining among the tech industry. “It translates to tech companies at a slower pace for additional hires.”

Hired, a jobs platform focused on tech and sales, hasn’t seen a slowdown yet and has already seen more hiring investment from Big Tech, according to CEO Josh Brenner, although it anticipates some volatility around small tech companies.

“From what we’ve seen, companies are focusing on the long-term to hire, after learning from the pullback that occurred in 2020,” he said in a statement. “It’s not worth turning off the hiring streak. Given the scale companies have had to make up for over the past year, we’re not surprised to see some relative slowdown year-over-year.”

Davis, an investor in the project, still sees great opportunities in investing in startups, as tough times “starve weak companies” without killing strong companies.

“I’ve told the LPs we talked to that this is actually hunting season,” Davis said. “It’s a great time to put money into the business. A lot of great companies have been built from recent recessions.”

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