Do mass layoffs in Big Tech mean big trouble for the U.S. economy? Probably not, according to a new report from Goldman Sachs Research.
It’s true that tech companies have an outsized influence on financial markets – accounting for more than a quarter of S&P 500’s market capitalization. While this means they garner significant media attention, they have far less pull on overall economic conditions, the authors wrote. They cite three main reasons why these recent high-profile job cuts are “probably not a sign of an impending recession.”
First, employment for the tech sector is small relative to the entire U.S. labor market. Employment at “internet publishing and broadcasting and web search portals” – which the authors say is the sub-industry for most major tech companies – accounts for less than 0.3% of total payrolls. “The unemployment rate would rise by less than 0.3 percentage points even in the inconceivable event that all workers employed in (this industry) are immediately laid off,’’ GS Research economists wrote. Even by more encompassing definitions of the sector, tech layoffs are not large enough to cause a meaningful change to overall labor market dynamics, they conclude.
The second reason the tech layoffs don’t indicate a looming recession is that the authors don’t expect these laid-off workers to stay unemployed for long. “Tech job openings remain well above their pre-pandemic level, so laid-off tech workers should have good chances of finding new jobs,” according to the report.
Third, tech layoffs have not historically been a leading indicator of a deterioration in the overall labor market. Job cuts in the sector have spiked from time to time without a corresponding increase in total layoffs. As of now, GS Research sees no indication that layoffs are rising significantly in other industries. “In fact, the main problem in the labor market is that labor demand is too strong, not too weak,” the authors write.
So why is Big Tech hurting and laying off workers?
For one, GS Research says that revenue growth for the industry is normalizing after the pandemic, during which time the sector experienced heightened demand for its products and services. The other is that higher interest rates and tighter financial conditions disproportionately impact the sector because tech company profits are typically expected further out in the future and therefore subject to greater duration risk.
“Tech layoffs are therefore an unfortunate side effect of the growth slowdown and tighter financial conditions necessary to rebalance the broader labor market,” the researchers said, “but for now appear narrowly concentrated and are probably not indicative of labor market dynamic in other sectors.”