In the back of our minds, we have an image of the decision to lay off employees and why it happens: The business must be in trouble.
Of course, employers can shed workers in other ways. Employees could be fired because of poor performance, and especially, voluntary turnover would shrink headcount just by freezing replacements. Average voluntary turnover in the U.S. is about 33% per year—in a big company, maybe 10%. A year-long hiring freeze would cut a lot of people and jobs.
Layoffs are different. They are a statement that we need to cut headcount fast and not wait for turnover to shrink the workforce. Why do we have to do that so fast? Again, it must be because businesses are in trouble. Are we? As a Wall Street analyst noted last week, “Earnings growth has been exceptional.” Revenue for companies in the S&P 500 is at record levels, as are share prices, despite the uncertainty from the war in Iran.
See also: Cutting too much: When HR needs to pump the brakes on layoffs
The companies that are laying off are not struggling, and no executive wants the broader community to think their business is in trouble. Have you noticed how often the story is, “We are cutting bureaucracy”? That word literally refers to systems where laws and regulations are administered by civil servants, so they don’t mean that. They mean the colloquial interpretation, which is just that we have rules and processes for making decisions, and almost by definition, rules stop many “decisions” that violate them. OK, so we are going to make more decisions now without rules and processes for making them. Good idea?
What about the claim that companies cut due to AI?
The current claim is that companies are cutting jobs because of AI. Except that the evidence is accumulating that AI has not eliminated nearly as many jobs as these companies want to cut. So, then the explanation shifts to say that these organizations anticipate AI will take over many jobs. Wouldn’t the sensible thing be to see how many are actually eliminated first before cutting them? Otherwise, how is the work going to get done if AI isn’t doing it and the people are gone?
Now we are on the third set of explanations: These companies say they need money to make big investments in AI, especially data centers, and especially the big tech companies. Let’s take a look at their finances.
Alphabet has a market capitalization of $4.2 trillion and $126 billion in cash on hand; Microsoft has $3.2 trillion and $90 billion in cash, having also spent $22 billion in share buybacks; Amazon has $2.8 trillion market cap and $123 billion in cash. Their annual revenues last year were $350 billion, $282 billion and $637 billion, respectively. Projected spending on AI is big—over $100 billion for each of these companies—but the investment community says that spending will be paid for out of revenues, which are at record levels so far this year.
Let’s turn to layoffs and the projected savings from them. AI tools, which summarize what analysts say, estimate that cutting 10,000 managers from a typical large corporation could save $2 billion per year, but the associated costs of layoffs, especially severance, will cost about $1 billion. So, the first-year savings from those layoffs will be only $1 billion. Look at that number against the enormous financial resources these companies are generating each year. Layoff savings are a drop in the bucket of both their revenues and projected expenditures.
Of course, there are exceptions, but the reason companies—especially the rich tech companies—are cutting jobs is not because they are in financial trouble or that AI has taken jobs or that they know already which jobs will be taken over or that they need the money to spend on data centers. The answer begins with pressure from investors who always want them to cut headcount—it makes revenue per employee jump up quickly—and many investors seem to feel that employers were coddling employees during and immediately after the pandemic. So now, we should be cutting, they think.
No one wants to say that out loud and risk public backlash. But why right now? The job market is soft. Even if the remaining employees get nervous and want to jump elsewhere or struggle under the additional workload of covering the now vacant positions, the weak job market means there is no place to go.
There is additional evidence for this view in data from Gartner on CFO financial plans for the year, which show that HR budgets are the lowest priority of any functional area. They are the most likely to see sizeable cuts and the least likely to see sizeable increases. It’s not just a general squeeze on costs everywhere.
Why are we squeezing HR and jobs? Because we can.
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