Derek breaks down the biggest economic mystery of the moment: Why are the most successful tech companies collectively laying off more than 130,000 people if the overall unemployment rate is still historically low? Then award-winning Puck journalist William Cohan rejoins the podcast to talk about the biggest unanswered questions swirling around disgraced billionaire Sam Bankman-Fried, his FTX bankruptcy proceedings, and his forthcoming criminal case.
In the following excerpt, Derek examines three explanations for the recent wave of layoffs in the tech sector.
Derek Thompson: The latest layoff news stands like this: 12,000 announced gone at Google, 10,000 at Microsoft, 18,000 at Amazon. Salesforce has laid off 10 percent of its workforce. Spotify, which owns The Ringer and this podcast, announced a 6 percent layoff. All told, more than 130,000 people have been dismissed from their jobs at large tech and media companies in the last 12 months; 130,000 people is more than the total number of workers at Apple before the pandemic. It’s a lot of people, but the overall unemployment rate in the U.S. remains 3.5 percent, and that is the lowest mark of the 21st century going out to one decimal point. So there’s a bit of a mystery here, a discrepancy between massive layoffs in big tech and an unusually low unemployment rate throughout the rest of the economy. So before I offer some theories, tell you how I’m seeing the situation, let me start at the most human level to say layoffs suck. They really suck for people being laid off. I’m not going to discuss—or I am going to discuss numbers in a second.
Numbers have a way of flattening human experience and turn everything into a staid statistic, so I do want to start by saying this: that when 130,000 people lose their job, even a good job, even a decently high-paying job, that’s still life-scrambling, and it’s anxious, and it’s hard, and it’s shitty.
So what is going on? This is a profoundly weird flipping of the 21st-century economic norm that we’ve come to know and understand, right? In the 2010s, the economy was weak. The labor market was weak. It was Silicon Valley that was booming. And then during the pandemic, even more so, the U.S. economy had this flash-freeze depression, but the tech sector absolutely boomed. By mid-2021, this is crazy. I think this stat came from the Substack writer Noah Smith: Just five tech stocks—Apple, Microsoft, Alphabet, Amazon, and Meta—represented 23 percent of the entire S&P 500 index. Five companies were a quarter of the whole S&P 500. That is insane.
Today, it’s the opposite. The U.S. labor market seems, by some measures, very strong, and yet the tech and media industries are the ones that are bleeding. So what’s going on? And what does this inversion of 21st-century norms tell us about the state of the economy?
Explanation number one, and this is the explanation I think that is being most commonly offered in the news right now, is that big tech simply over-hired in the pandemic. Pure and simple. The big-tech CEOs made a mistake, and this now is the correction. So what does this mistake look like in numbers? Well, look at Meta, the parent company of Facebook and Instagram. In 2019, Meta had about 44,000 employees. By September of 2022, they had 87,000 employees. So during the first two and a half years of the pandemic, Meta added another Meta in head count. It invested in workers in anticipation of an economy that did not arrive. So why didn’t it arrive? Why did all these companies make the exact same mistake?
Well, as I wrote last week in The Atlantic, I think the post-pandemic economy has just ended up much weirder than most people anticipated. A lot of people, and I’m putting myself in this category, predicted that the digitization of the economy that we were seeing in the pandemic, like the rise in streaming. Everyone was streaming. No one was going to movie theaters. Everyone was adding new food delivery apps. No one was shopping in grocery stores. Everyone was joining Peloton and doing at-home fitness stuff rather than going to gyms. We called these accelerations. We said the pandemic is pushing everyone into a future that’s coming anyway. And so tech companies invested like it. They in some cases doubled their workforce, but maybe the pandemic wasn’t an accelerant. Maybe it was a bubble.
We were familiar with calling pandemic stocks bubbles, like Peloton and Robinhood—these stocks that soared and then crashed by like 90 percent. Well, the same happened with employment, and then at these tech companies, like Alphabet and Amazon, they faced all sorts of challenges during the pandemic, whether it was supply-chain challenges. Then inflation happened. Then interest rates increased. Then their stock valuations were punished. And so all of these companies thought the pandemic was like this time machine thrusting them into the future, and it wasn’t. It was a mirage. And now the mirage has disappeared and so have the jobs.
The second explanation for this moment is, and I’ve given this story before on the podcast, it’s the interest rate theory of everything. When interest rates were low, investors were willing to plow their money and hold their money in companies that had great stories about the future: companies like Tesla, or Peloton, or Robinhood, or even Meta and Alphabet. But when interest rates started rising, stocks started falling, and you saw investment flowing from tech, which was the future, to all sorts of companies like CVS or United that were just sort of service companies that had healthy margins. And that adjustment in the markets forced these companies—Netflix, Uber, Tesla—to change the way they did business to lay off a lot of people. And as we’re about to see in a second, I think those layoffs sort of made it safer for other CEOs to lay off their workers, to eke out higher margins in their businesses.
A third explanation I want to quickly gloss over is that it’s become a joke in tech that over the long run, every company becomes an advertising company. So obviously Google is an advertising company, and obviously Instagram and Facebook are advertising platforms. For a while, something like 80 to 90 percent of every single marginal dollar in digital media was being earned by either Facebook or Google. They were the two-headed monster, the Hydra; they were the duopolies. But in the last few years, other companies have essentially become or tried to become advertising companies. Amazon is the fastest-growing advertising company in the world. You’ve seen Netflix say, “We want to get in on advertising.” You’ve seen Uber start to show ads in their platform when you hail a car. And I think maybe as more of these companies have become advertising companies, they become more sensitive to slowdowns in advertising.
Host: Derek Thompson
Guest: William Cohan
Producer: Devon Manze