Thoughts about the great layoffs

The ongoing layoffs might make sense for society as a whole but make everyone anxious

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For a few years now, I have been quite anxious about my prospects for ongoing employment. And I am not the only one; it seems that almost everyone I talk to is feeling the same sort of anxiety. That is a terrible state of affairs because a) it is a bad feeling and b) stress makes stupid, and that doesn’t help improve the behaviors that would make you more secure in your job.

It is not hard to pinpoint the start of the anxiety wave: The great layoffs of 2020, which came as a total surprise, but which seem to have become a fact of professional life in the tech industry. There is even a handy website that tracks who is laying off how many people. At the time of writing there were apparently 137,050 layoffs in the tech industry in the year to date. Behind that number are 137,050 personal dramas of people losing healthcare, people no longer being able to afford their mortgage, people getting in trouble paying their student loans, people losing their work permits, and people having to move their kids to different schools. At the least, it is 137,050 people having a very bad couple of days and probably not sleeping very well for a while.

I have my own theory of what has been going on in the tech industry. It might be quite contentious, but I am going to share it with you regardless.

Let’s start with the following question that I get with some regularity: “You have been in this industry for a very long time, you must be absolutely loaded.” The answer to this is that I am not. I am doing just fine (thanks for asking), but I am not in the top 1%. Apart from a lavish spending pattern with expensive hobbies, the main reason I am not completely loaded is that the enormous increase in compensation, mostly fueled by very generous stock prices, is a thing of the very recent past.  For most of my career I earned well, but I was definitely not tracking towards building generational wealth because quite simply nobody who had a regular job was.

When I started studying computer science that was considered a smart choice because computer scientists were very much in demand already. That said, the best I could expect from being a wage slave was a comfortable upper middle class existence. And for the first few decades of my career, that was where I was at. I was doing well, but “doing well” largely consisted of it being easy to find a well-paying job, being able to afford a decent place to live, to have good healthcare, and to send my daughter to school for free.

When I graduated in 1988, there was an economic crisis going on. The whole economy was stalling, unemployment was high, and there was a lot of depression, economic and otherwise.

As an indicator of the mood: There were ongoing discussions about how to give a meaningful existence to the many people that we thought would never have a paying job.

But when I graduated as a newly minted software engineer, it wasn’t just easy to find a job, there were actual job fairs for the few people around who knew how to program computers. My friends and family were astounded! Job fairs! Where employers competed for scarce talent! That was simply unheard of. Most of my non-CS friends also found jobs, but typically after a few months of dedicated searching and often not in the field they had majored in.

Although, at that time, people were already warning me not to study computer science because courtesy of artificial intelligence and fourth-generation programming languages, professional software engineers would soon be joining the ranks of the professional cole shovelers. I have been hearing this again lately…

The job fairs and the overall shortage of computer scientists did not really translate into much higher salaries though. We got a bit of an uplift because of “labor market conditions”, but when I started in my first job, my salary was low enough to qualify for participation in the low-cost social healthcare fund (“ziekenfonds”) through which the majority of the population was insured (higher earners and entrepreneurs did not qualify and had to insure themselves privately). 

Things started changing in the mid-to-late nineties as the Internet took off and we started seeing the first occurrences of the network effect, a business principle that states that the more people use a particular service, the more valuable it becomes. This effect drove relentless loss-leading growth that would soon be converted to fantastic profits once the companies figured out how to make money from their billions of users. This phenomenon had a stunning impact on compensation: In the olden days, compensation had to make sense with regard to the bottom line of the company.  Consequently, salaries stayed reasonable because companies should be able to afford them from their income. But if you are burning through millions (and later billions) of dollars of venture capital in order to grow as fast as possible, that rule no longer applies. The only thing that matters is whether you can hire talent (that will make that growth happen) fast enough.

Hiring picked up, but there was still a scarcity of talent and that compounded the trend. Big tech could afford to pay high salaries and give generous equity packages, and so battled for scarce engineers. Things started getting out of hand fast and salaries rose quickly. Some tech companies reportedly tried to keep salaries down by agreeing not to poach each other's top engineers, but the cat was solidly out of the bag and total compensation rose sky high. There was even a battle for interns! When I was interning in 1986, my friends and family were astounded that I got a stipend in the order of minimum wage. But by the mid noughties, you had to pay interns a generous salary and there were even discussions about giving interns equity.

Of course supply rose to meet demand: Many people started studying computer science, often taking stupendous loans to afford it. Additionally, a lot of people moved to the areas where the demand was manifesting itself. That in turn put pressure on other markets such as real estate and education. People started earning more, but they also needed more money in order to live in the places where they worked. This gave rise to an article in the San Jose Mercury News that called out the fact that in the Bay Area, you could be making $400,000 per year but still be struggling. 

That article reportedly escaped to US states with a lower cost of living and there people’s heads exploded about the economic realities in the more affluent parts of the country.

The battle for talent between companies with very deep pockets drove up the price of talent for everyone. This led to situations where organizations without deep pockets still had to pay top dollar for “the best of the rest”. Some of them were just cut out of the market altogether. Some organizations, like government institutions, were no longer able to hire the talent they needed to make sure that their tech was working and stayed working. This sad fact helps explain why so many government IT systems are outdated, which is causing real problems in society: They just couldn’t hire the people they needed at the prices they could afford!

The big tech companies continued to hire at these high prices, even though, all things considered, they maybe didn’t need as many people. Some of them were solidly in the area of diminishing returns, where each new employee contributed less and less to the bottom line. At Google we were eyeballing graphs of revenue per employee as far back as 2016. Eventually “the shore turned the ship” (as we say in Dutch) and companies started realizing that they were overstaffed and probably paying too much. The great layoffs started…

Even if you are not in the habit of clicking on the links I include in these articles, click on this one about Google’s revenue per employee. It really says it all.

These layoffs led to a trickle down effect (it is real in this instance!): The companies that had previously been condemned to hire “the best of the rest” at inflated prices figured out that they could restaff, either at the same quality of talent for a lower price or at the same price for a higher quality of talent. Most people who got laid off found a job again, but many had to take a pay cut, or move, or both. Each of these instances is a personal drama, but for society as a whole it is merely a bit of a reset as the whole system adjusts to the new realities and the price of labor adjusts to a point where supply and demand meet.

When this started happening, I read many angry posts on LinkedIn that it was outrageous that companies that were making billions and that had even more billions in the bank, laid people off. In my opinion, the people who wrote these posts were a bit naïve and seemed to have misunderstood the nature of the system we are all operating in. The same trends that made compensation go sky high, made companies lay people off once they figured out that they could make do with fewer of them at lower prices.

The layoffs were obviously a tremendous shock for everyone. Never before had successful big tech companies laid off people. There had been layoffs during the dot-com bubble, but those were mostly related to startups shutting down. There was a slow-down in hiring during the 2008 financial crisis, but those were mostly head-count caps and hiring freezes. Sure, recruiters were let go or recycled as project managers, but engineers were still secure in their jobs. The great layoffs of 2020 were something new: Big profitable companies with billions in the bank let high-performing senior software engineers go! This was clearly something else.

The fact that companies were now laying off people who were performing well ensured that everyone felt like they were given a warning: From now on, nobody was safe anymore. You could be doing well on a project that some VP was no longer interested in and out you went! Or that super cool device that you were working on was no longer strategic to the company and rather than recycle the engineers somewhere else, companies would from now on just lay them off.

The great layoffs started a bit squeamishly, as no company wanted to be the first, but as soon as the first sheep crossed the dam (another Dutch saying), others followed with gusto. And where the first waves often got generous severance packages to soften the blow, that also went out of the window quickly. 

The shocks caused by the layoffs will be reverberating through society for a while until some new equilibrium is reached. Overall I believe the price of IT talent will drop to levels that are more sustainable for society as a whole and might allow organizations with shallower pockets to hire some decent talent as well, thereby fueling growth in areas of human endeavor that are very worthwhile but that do not benefit from the network effect and the associated high take rates (30% for Apple on in-app purchases, really?)

Unfortunately, this reset of the system comes at enormous personal costs for everyone involved. Many people have gotten themselves in a situation where they need a large compensation package in order to live their life. Apart from the fact that it is very easy to get accustomed to a more luxurious lifestyle, a lot of people got themselves into debt in order to be able to participate in the high stakes game that is big tech: Student loans, mortgages, and private school fees all need servicing. Obviously, nobody wants to downsize their lifestyle, but the sad fact is that a lot of us will have to, by at least a little bit. That hurts.

It also often feels unfair because we all know incredible idiots who are doing much better than they ought to. Being laid off is never fun, but it is even worse when it is not even directly related to your performance or to the dire financial straits of your employer. We created a winner takes most world and for a while we thought that we could all be winners all the time. If nothing else, the great layoffs drove the message home that we can’t.