Why is every tech company suddenly laying off about 6% of its workforce?

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Why is every tech company suddenly laying off about 6% of its workforce?

By James Surowiecki

As the most recent job report showed, the U.S. economy as a whole was still humming along nicely in January. But in the tech industry, the new year got off to a depressing start, with Amazon announcing on January 4 that it would be laying off 18,000 employees, or 6% of its corporate workforce. Microsoft followed suit a couple of weeks later, laying off 5% of its staff, and then Alphabet said it would be laying off 6% of its employees. In the days since, the downsizing trend has continued, with Okta, Spotify, business software company HubSpot, cybersecurity firm NCC Group, and PayPal all announcing layoffs. To be more specific, all of these companies announced layoffs of between 5-7% of their workforces.

The fact that tech companies are cutting back is not surprising. The industry embarked on a hiring spree during the pandemic, and the slowdown in the digital advertising market and anxiety about a possible recession, coupled with the big hit to tech companies’ stock prices last year, has made “efficiency” a new preoccupation of tech CEOs. But what is interesting, and perplexing, is the fact that so many of these CEOs have decided that when it comes to layoffs, about 6% of the workforce is a magic number.

After all, while these companies have certain things in common, their underlying businesses are very different, and their income statements and balance sheets look nothing alike. So if the layoffs are the product of careful calculation by these CEOs about the number of workers they need to optimize the future value of their companies (which is what an economics professor might suggest), you wouldn’t think they’d all arrive at roughly the exact same conclusion. And yet, with some exceptions (like Meta and IBM), they have. So what explains this odd synchrony in these companies’ layoff decisions?

One likely answer is that tech CEOs pay attention to each other, and in particular to the most important players in the industry, and that they take cues from each other as well. The boom in 6% layoffs, then, is something like a fad—the product of what Stanford professor Jeffrey Pfeffer has called “social contagion.” Just as people everywhere decided a decade ago that planking in weird places was a worthwhile thing to do, tech companies have decided in the past few months that about 6% of their employees are surplus to requirements.

This isn’t, as it happens, a new phenomenon. There’s interesting academic work about the rise of downsizing in the 1980s that shows that trend-following helps explain companies’ willingness to slash payrolls. While downsizing was initially seen as a dubious strategy, it became normalized over time, which in turn made it easier for companies to embrace. On the flip side, the tech industry’s hiring spree from 2019-2022 was also likely in part the product of trend-following: If everyone else was doing it, then it was hard to resist doing so yourself.

Now, talking about the boom in layoffs as all about imitation makes it seem casual and ill-considered. But there actually is an underlying logic to it. Tech companies were, in many cases, overstaffed by the middle of 2022. But there’s no easy algorithm to tell a company how much it’s overstaffed. So looking at what other companies in their industry were doing was a natural response. It’s an example of what social psychologists call “social proof”: when people are in ambiguous situations where the correct way to behave is not obvious, they will often look at what those around them are doing in order to decide what to do.?

Tech companies are also trying to keep two different constituencies happy: their employees, who will generally be made anxious by layoffs, and investors, who generally love them. (The Nasdaq, in fact, was up 10% in January.) If they cut too much, it will aggravate employees. If they cut too little, investors will be critical.

What CEOs want, then, is a number that seems reasonable, and that will insulate them to some degree from criticism. And that’s what that the 6% number is—precisely because it’s what so many other companies, and in particular heavyweights like Amazon and Alphabet, have settled on. After all, if it were a dumb move, would everyone be making it? Tech companies may pride themselves on thinking outside of the box. But when it comes to hiring and firing, they’re more like part of the herd.?

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