The upside of the mass tech layoffs 📈
Companies outside of Silicon Valley might finally get the tech talent they need 👩💻
Despite months of mass layoffs at big tech firms — just in the past 10 days, Meta announced 10,000 more cuts and Amazon announced 9,000 additional cuts — unemployment in the U.S. remains very low.
This suggests many people losing jobs at these companies — and others — are finding employment elsewhere, a theory supported by BLS data.
But something might be happening that’s even more consequential than workers just going from one place to another to collect income.
“For decades, Big Tech has hoarded top tech talent, starving Old Economy firms of the technical skills required to meet their digitization goals,” wrote Kai Wu, founder and CIO of Sparkline Capital. “Now, as Big Tech relaxes its grip on the labor market, legacy firms see a golden opportunity.”
In a research note titled "Digitizing the Old Economy," Wu explores what’s going on with labor market flowsand offers some fascinating insight on what’s unfolding.
“While Big Tech retrenches after their pandemic hiring binge, other firms are still recruiting tech workers,” he observed. “Demand remains especially robust at Old Economy firms, which now account for 60% of open tech jobs (compared to 39% in Jan 2020).”
So-called Old Economy companies, Wu explains, are found outside the tech sector that have an increasing need for tech-minded employees. He cites Honeywell, Boeing, Lockheed Martin, and several large banks as examples in his report.
Doing a little bit of backtesting, Wu found that the stocks of Old Economy companies with a lot of jobs requiring high tech skills — which he calls the Early Majority — have outperformed those that haven’t been hiring for these skills. He believes these Early Majority stocks could offer value to a diversified portfolio.
Wu’s work is rigorous and nuanced. I’m not gonna summarize all of his methodology and findings here. You can read his report on his website.
It’s hard to predict how good the future might be 🔭
I’m not trying to downplay the difficulties that come with getting laid off. And tech workers aren’t alone. Many people in most industries don’t experience smooth, linear career paths.
But it’s not unusual to hear stories about how being laid off was one of the best things that could’ve happened to a person.
“Old Economy employers offer more than just a safe harbor from uncertain labor markets,” Wu wrote. “For many tech employees, applying their skill sets to solve problems in other domains is quite rewarding. These fields are much less saturated by software and thus more ripe for digital transformation.“
With that in mind, I can’t help but be excited about what this could mean for the economy and society. There are only so many upgrades a tech company can make to an operating system or an app or a smartphone before you can’t really tell if anything’s improved from one version or another.
Maybe one of these laid-off tech workers will finally invent eyeglasses that don’t fog or an umbrella that’ll keep you dry in a windy rainstorm. Maybe someone will develop a cost-effective way of desalinating water or an environmentally friendly way of disposing of plastic waste. Maybe someone will create a salad that’s healthy — and that tastes better than pizza.
It’s hard to imagine with any accuracy the innovations that could emerge as tech talent disperses into companies based outside of Silicon Valley.
One thing seems likely: For diversified investors, this is probably more bullish than bearish. From 10 truths about the stock market 📈:
This makes sense if you think about it. There are way more people who want things to be better, not worse. And that demand incentivizes entrepreneurs and businesses to develop better goods and services.
And the winners in this process get bigger as revenue grows. Some even get big enough to get listed in the stock market. As revenue grows, so do earnings.
Maybe innovation stagnates. Or maybe it surprises us again and drives better-than-expected stock market returns for years to come.
To be clear, we don’t need a bunch of paradigm shifting inventions to benefit as an economy. System-wide outages at SouthWest Airlines this past winter showed the world that even Fortune 500 companies just need help modernizing their outdated tech.
Wu believes we may be early in the layoff cycle, which means it could be a little while before we really start to see the impact of this tech talent dispersion.
As is often the case for investors in the stock market, time is an edge.
Related from TKer:
For a long time, Wall Street was the top destination for young people looking to make lots of money. But as Silicon Valley got bigger and richer, big tech companies and startups began unleashing what seemed like limitless amounts of cash and stock to hoover up all the top STEM talent. And so you got headlines like:
Silicon Valley vs. Wall Street in talent war - MarketWatch, 5/30/2013
Talent wars: Silicon Valley vs. Wall Street - CNN, 08/22/2023
A Closer Look At The Silicon Valley Vs. Wall Street Talent War - TechCrunch, 06/25/2015
A New Breed of Trader on Wall Street: Coders With a Ph.D. - The NY Times, 06/23/2016
Tech firms shell out to hire and hoard talent - The Economist, 11/05/2016
Goldman Sachs wants to become the Google of Wall Street - Business Insider, 04/06/2017
Over the past year, Silicon Valley and Wall Street have been leading the way with layoffs amid rising interest rates and slowing growth.
The labor market may not be as strong as it seems. We tend to focus on the addition to payrolls and the unemployment rate. However, we might be overlooking the fact that layoffs are taking place in primarily in higher-paying jobs and the new hiring is primarily in lower-paying jobs. In other words, we're trading tech jobs for more leisure and hospitality jobs. It's nice that many laid off tech workers can find another tech job relatively quickly, but does that new tech job pay as much or more than the old one? Probably not, which might also explain why wage gains have been lagging inflation. Labor shortages, where they exist, are easily resolved by a rising participation rate or an increase in legal immigration. The first is a hope. The second is serious policy that our politicians are incapable of considering.