When a recession looms, from an investment point of view, big investors sometimes put pressure on companies to make necessary savings in order to protect the longevity of a company. This is important for a number of reasons, but from a human point of view, scary news is the impact of job losses.
Quite often, humans are seen as expensive, this is why you will often see job losses in recessions, as demand for staff grew, so did salaries, especially in large tech companies and now many companies feel they may not be getting good value for money out of their employees.
Let’s think about the economics of layoffs.
As the world continues to grapple with the economic fallout from the current uncertain times, many industries are bracing for a potential recession. And, as in past economic downturns, big tech companies are not immune to the financial pressures that come with a recession.
It’s no secret that the tech industry has been one of the most resilient during the pandemic. We have seen companies in the tech sector have huge growth in Companies like Google, Facebook, and Uber have seen a surge in usage as people have been forced to spend more time at home. However, as the economy begins to slow down, these companies are now facing decreased demand for their products and services, which is leading to decreased revenue.
When a company’s revenue drops, it may look to cut costs in order to stay profitable. One way they may do this is by laying off employees. While layoffs are never easy, they can be especially difficult for tech companies as they often rely heavily on their workforce to drive innovation and growth.
Another reason for layoffs is that institutional investors, who own a large share of a company’s stock, may demand cost-cutting measures such as layoffs in order to boost the company’s stock price. This can put pressure on a company’s management to make difficult decisions. From a personal point of view, this has always been something that I have struggled to understand. I find often institutional investors are too quick to try and solve the fortunes of one company with massive layoffs, but the effect this will have on other companies and therefore the wider economy can often present a situation where layoffs cause a decrease in the overall portfolio due to the uncertainty that arises due to the increase in unemployment.
Having said this, institutional investors will often lobby companies for layoffs when they think they are completely necessary for that company. You see this quite often with active investors having a more pronounced part in the corporate governance of the companies.
It’s important to note that these layoffs are not just a problem for the tech industry, but for many industries that have been hit hard by the pandemic. However, the tech industry has been particularly affected as the demand for technology has been a driving force in the economy for the last few decades.
While it’s never easy to see companies laying off employees, it’s important to remember that these decisions are not made lightly. Companies want to stay profitable and continue to innovate, and sometimes that means making difficult decisions in order to do so.
It is also worth mentioning that some of these companies are also investing in other areas, like remote working and automation, which may lead to some jobs becoming redundant.
To sum up, the current economic climate and demands of institutional investors can create a difficult scenario for big tech companies and force them to make difficult decisions, like layoffs. These are not decisions that are taken lightly and are a reflection of the current market conditions.
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