Why are Tech Jobs Declining in a Recovery?

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This question, posed and somewhat answered by Kevin Kelleher of GigaOm. In the article, Kevin suggests that with M&A (Mergers and Acquisition) activity up, among other things, some 17,000 jobs in the past month have been lost.

From an investment standpoint, founders and venture capitalists have good reasons to cash out now. Market caps of public tech giants are rising “” the Nasdaq gained 15 percent last quarter alone ““ and so are their cash stockpiles: Microsoft is sitting on $49 billion in cash; Google, $24 billion. The IPO market is coming back to life, but not enough to meet the pent-up demand. And high-profile deals like the ones we’ve seen recently have a way of spurring on other acquisitions.

The risk is that, just as the quality of IPOs tends to deteriorate the longer a market boom lasts, a wave of M&A deals will bring on marriages that make less and less sense.

Kevin would be correct. Major acquisitions have been announced in the past few months including Adobe’s purchase of Omniture at an estimated $1.8B valuation, eBay’s sale of Skype for $1.9B in cash as well as the mammoth acquisition of EDS by HP.

337/365: The Big Money

I think it’s more than M&A though. I don’t claim to be anything more than an armchair economist, but I think there’s some sense that this recession isn’t over yet, even if the key indicators (sans unemployment) are heading north. For one, I think there’s a sense that as long as key Fed interest rates are maintained at a 0% or near-0% level, companies can continue to cut staff and pocket more money. Less money going to interest means more revenue in a trickle-down sense. More revenue means more cash on hand. Slashing jobs provides cover for higher profits. Wall Street likes higher profits. Stock prices increase. Especially since Wall Street sees no end in sight for 0% lending rates.

Additionally, there continues to be a risk of a whiplash recession resulting from hyperinflation. With an influx of newly minted cash into the market thanks to bailouts and the Troubled Asset Relief Program (TARP) bill, the economy runs the risk of quickly reaching a point where over-inflation becomes a very real risk. In an over-inflated market, the cost of goods, services and products increases while the value of money inversely decreases creating a vicious cycle that feeds upon itself. A company with $10B in costs suddenly needs $15B or $20B for those same costs. Meanwhile, the value of a single dollar declines in a proportional way feeding the frenzy.

In my non-expert opinion, the companies laying more people off are both reading the writing as well as feeding the lion.

These companies see the potential danger ahead and as any good, economically conservative, risk-averse company is, they are choosing to mitigate their risks in a completely legitimate and sensical way – cut costs via layoffs and other cost saving measures.

The danger this approach takes is that by doing so, they are feeding the Wall Street monster that looks for the increasing profit margins with little end to 0% rates. These investors buy the stocks, increasing the net worth of the company while simultaneously encouraging a pattern of layoffs and non-hiring.

Though companies will need to hire again (because you can’t just take artificial profits forever), there is little incentive to do so now, especially with the risk of a whiplash recession.

It’s a difficult-to-end cycle.

Photo taken by David Muir

Comments

  1. says

    In my country, job posting especially for tech job seem to grow again rather than early this year and last year. And they choose the very best candidate.

  2. says

    I don’t believe the signs *are* going positive… GDP is up yes, but what does that mean? Well, here’s the formula:

    GDP = private consumption + gross investment + government spending + (exports − imports)

    * Consumer purchases are up slightly (2%), but overall sales tax revenue is down nationwide which makes me question it…
    * Investment was flat.
    * Exports are up 17%, but
    * Imports are up 20% and are a bigger number anyway.
    * So what does that leave?

    The thing that’s growing more and faster than anything else is government spending. Admittedly, it’s only up 8.3% this quarter vs 11% last quarter but at that rate, government spending will double every 8 quarters.

    Definition: http://en.wikipedia.org/wiki/Gross_domestic_product
    Release: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

  3. says

    I think it is because of the outsourcing to places like India for our tech jobs. The good old American saying of you get twice as much for half the price is very true in most cases.

  4. says

    My 2 cents:
    I think the recovery cycle hasn’t had a positive impact on the tech sector yet. If only we had a tech equivalent of the Baltic Dry Index!
    It may still take some time for the tech companies to see their pipeline grow and get stronger as the recovery gains in magnitude and till then, they would probably continue in their cost optimizing mode as you mentioned.
    At some point in the recovery stage, the demand for tech products & services will pickup, that in turn will trigger tech companies to stop downsizing and start recruiting. It’s on it’s way but hasn’t reached yet…

  5. says

    I agree with Micah above. Tech jobs are declining in the US because most companies are outsourcing outside. I expect this to increase, not decrease. Pay less and get more or less same quality.