After experiencing record-breaking growth during the pandemic, does the recent spate of tech sector layoffs portend trouble for the larger Canadian economy?
Over the spring and summer, thousands of jobs have been cut from the tech sector and the big players were no exception. Juggernauts like Meta (Facebook’s parent company) reduced engineer hires by 30%, Shopify and Wealthsimple laid off 10 and 13 percent of its workers respectively, and Amazon has scaled back on expanding its workforce.
Many would be tempted to conclude that the recent disruptions we’ve seen within the technology sector reflect troubling signs for the larger economy. Although tech sectors are impacted by worrying economic indicators such as the high inflation and supply chain challenges, these macroeconomic pressures are not the sole indicators of the tech sector’s overall outlook. Layoffs and hiring freezes in the tech industry are a result of a very unique set of circumstances that are not directly correlated to the economy at large.
The conditions that led to the current onslaught of layoffs indicates a market correction, rather than an impending recession. Here’s why:
The technology sector is characterized by growth
Tech companies operate on the idea of growth. HR decisions are oriented around the kind of investment they would have to make in order to continue growing. Companies will often make capital and labour investments without corresponding current revenue in hopes the growth they’re predicting will allow them to recuperate their investment quickly.
As public health restrictions came into effect during the COVID-19 pandemic, online activity exploded, and many tech companies saw record-breaking profits. For tech companies, unprecedented times meant unprecedented growth.
The pandemic economic condition created a false sense of permanent change
As the story progressed in March of 2020, there was rapid adaptation into a digital-first way of life, from ordering food deliveries and groceries, to interacting with co-workers on Zoom. Changes that weren’t thought to be possible even a few months prior suddenly unfolded.
This backdrop prompted robust discussion of what life would be like after the pandemic subsides, and whether many of these changes are likely to become permanent. The argument relied on a concept of default or status-quo bias from behavioural economics which implies that once people get accustomed to a digital way of life, there would be little appetite to switch back, creating permanent changes.
There were many indications to this effect, from research that shows low impact on work-from-home productivity, to governments creating programs that support businesses in adopting digital technology and e-commerce. People enjoyed the perks of work-life flexibility and time saved from commuting, while big tech companies benefited from the surge of technological innovation to support those that could work remotely.
Tech companies therefore, made hiring and investment decisions believing that people will continue to primarily rely on digital technology for economic and social interactions even after the pandemic subsides. Facebook’s rebranding to Meta and subsequent focus on the metaverse, an entirely digital space, and movie studios continuing to premiere new movies on streaming services are just some examples of this thinking.
Does the cooling tech labour market signal trouble for the Canadian economy? Not necessarily.
After experiencing record-breaking growth during the pandemic, does the recent spate of tech sector layoffs portend trouble for the larger Canadian economy?
Over the spring and summer, thousands of jobs have been cut from the tech sector and the big players were no exception. Juggernauts like Meta (Facebook’s parent company) reduced engineer hires by 30%, Shopify and Wealthsimple laid off 10 and 13 percent of its workers respectively, and Amazon has scaled back on expanding its workforce.
Many would be tempted to conclude that the recent disruptions we’ve seen within the technology sector reflect troubling signs for the larger economy. Although tech sectors are impacted by worrying economic indicators such as the high inflation and supply chain challenges, these macroeconomic pressures are not the sole indicators of the tech sector’s overall outlook. Layoffs and hiring freezes in the tech industry are a result of a very unique set of circumstances that are not directly correlated to the economy at large.
The conditions that led to the current onslaught of layoffs indicates a market correction, rather than an impending recession. Here’s why:
The technology sector is characterized by growth
Tech companies operate on the idea of growth. HR decisions are oriented around the kind of investment they would have to make in order to continue growing. Companies will often make capital and labour investments without corresponding current revenue in hopes the growth they’re predicting will allow them to recuperate their investment quickly.
As public health restrictions came into effect during the COVID-19 pandemic, online activity exploded, and many tech companies saw record-breaking profits. For tech companies, unprecedented times meant unprecedented growth.
The pandemic economic condition created a false sense of permanent change
As the story progressed in March of 2020, there was rapid adaptation into a digital-first way of life, from ordering food deliveries and groceries, to interacting with co-workers on Zoom. Changes that weren’t thought to be possible even a few months prior suddenly unfolded.
This backdrop prompted robust discussion of what life would be like after the pandemic subsides, and whether many of these changes are likely to become permanent. The argument relied on a concept of default or status-quo bias from behavioural economics which implies that once people get accustomed to a digital way of life, there would be little appetite to switch back, creating permanent changes.
There were many indications to this effect, from research that shows low impact on work-from-home productivity, to governments creating programs that support businesses in adopting digital technology and e-commerce. People enjoyed the perks of work-life flexibility and time saved from commuting, while big tech companies benefited from the surge of technological innovation to support those that could work remotely.
Tech companies therefore, made hiring and investment decisions believing that people will continue to primarily rely on digital technology for economic and social interactions even after the pandemic subsides. Facebook’s rebranding to Meta and subsequent focus on the metaverse, an entirely digital space, and movie studios continuing to premiere new movies on streaming services are just some examples of this thinking.
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Extraordinary responses to extraordinary circumstances
However, as the pandemic restrictions eased, it became clear that many of the changes once thought permanent, were truly extraordinary responses to extraordinary circumstances. People missed face-to-face collaborations, and for many, digital interaction just could not substitute for in-person conversations.
This meant the growth that many tech companies had banked on did not materialize to the level they were expecting. Tech companies were not experiencing the same demand they forecasted, in turn impacting their standing with investors due to lower than expected returns on their investments.
With online activity in plateau, many workers who were hired to grow the business no longer could. Big tech companies had to respond by reducing their workforce—especially in the face of inflation and high interest rates—to protect their depleting capital.
Understanding short term shock – a cautionary tale
Just as much as it was likely wrong for technology companies to make significant medium-term investment decisions in the midst of an extraordinary event, it is not prudent to extrapolate what recent adjustments mean for the technology sector, and the wider economy, in the long run.
The technology sector has always been more volatile (in both positive and negative ways) than the wider economy, but it has also been crucial in ensuring the whole economy’s long term economic competitiveness. And while many of the layoffs are in response to macroeconomic conditions, a recession is still not inevitable, and a long recession even less so. This is also supported by the recent Labour Force Survey statistics which state the employment was slightly impacted, but compared to 2021, we are doing better. Moreover, the unemployment rate remains at a record low.
On an equally important note, it is vital to understand that these layoff announcements have thrown thousands of lives into uncertainty. It is crucial that displaced workers make a smooth transition into new careers to make sure that this downturn is temporary and there is no severe economic backlash. While many will experience a quick and relatively painless transition into a new role, thanks to Canada’s still-competitive labour market, it’s incumbent upon businesses and policymakers to ensure laid-off workers receive appropriate support so they can keep our economy competitive and prosperous.
For media enquiries, please contact Nina Rafeek Dow, Marketing + Communications Specialist at the Brookfield Institute for Innovation + Entrepreneurship.
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