Last week, while I was waiting with bated breath for the October inflation report, the headlines were buzzing with a series of announcements that seemed to bode poorly for the economy.
Tech companies had muscled into the news cycle, announcing massive layoffs and hiring freezes. The cuts were dramatic and part of a running trend: The sector has shed nearly 120,000 jobs globally so far this year, and more than 23,000 in November alone, according to one layoff tracker.
Tech companies are important to the overall employment picture, but not because of this latest round of job cuts. Layoffs are bad news, to be sure, but the sector’s impact on employment is much more nuanced than the number of jobs it creates or destroys.
Instead, tech is powerful because of its ability to transform work and reshape the drivers of economic growth. The industry’s job cuts are dominating the news, but they obscure the sector’s outsized positive impact on work, productivity – and costs.
In short, don’t read too much into the sector’s current slump.
Tech growth is returning to normal
Technology is the backbone of the digital economy, which falls roughly into three buckets.
Bucket one is hardware and software. Bucket two is e-commerce, the buying and selling of goods and services online. The third bucket is streaming services like the ones that make it possible for me to talk to you by video almost every week.
Together, these three buckets of the digital economy accounted for about 10 percent of U.S. GDP in 2020.
At the outset of the pandemic that year, the digital economy grew by 4 percent from the previous, pre-pandemic quarter while the broader economy suffered a 3.4 percent decline.
As the physical economy shut down, the digital economy stepped up. People ordered groceries and restaurant meals online, streamed movies with abandon, and held video calls with loved ones.
With the worst of the pandemic behind us, our old habits have returned. We’re shopping in brick-and-mortar grocery stores and going to theaters and sporting events. Next week, millions of us will travel to celebrate Thanksgiving with our families — in person.
So it should come as no surprise that tech’s meteoric growth rate during the pandemic has slowed. E-commerce sales soared 50 percent in 2020 from the year before. This year, online sales are up about 7 percent, a growth rate that’s in line with pre-pandemic quarters.
Big headlines, small economic ripples
Technology companies represent just 2 percent of U.S. employment. Other sectors are much bigger in terms of headcount. Leisure and hospitality workers make up 11 percent of total U.S. employment, the broad-based sector of trade, utilities and transportation 22 percent, and professional business services 17 percent.
So while technology layoffs affect individual companies and their workers, the sector’s employment writ large is a very small percentage of the overall job market.
Moreover, tech largely avoided the pandemic-driven destruction of millions of jobs at consumer-facing industries. In fact, technology companies were able to hire aggressively during the pandemic as they took advantage of the surge in digital commerce.
As the economy returns to normal, it’s to be expected that tech sector hiring will return to normal, too.
And not every round of layoffs is tied directly to economic headwinds. Twitter Inc. severed ties with half its workforce on Nov. 3, but that was after a new management team took the reins. It’s hard to draw conclusions about the economy from one social network’s job cuts.
In fact, hiring in other, larger service sectors, though slower, remains robust.
Tech has changed the way we work
Tech’s biggest labor market impact is not how many jobs it creates or destroys, but how it has changed, and continues to change, the nature of work.
The sector’s biggest contribution to the economy has been workplace efficiencies and lowered costs. In a relatively short period of time, technological innovations have scaled production and delivery in manufacturing and services.
With the pandemic, technology further transformed the labor market through the magic of remote work. Though most jobs still require employees to be on site, for many other people, remote work has become a valuable feature of employment that will be difficult to eradicate.
I finally got the headline I was waiting for last week. On Thursday, the Bureau of Labor Statistics reported that October had tapped the brakes on inflation. Year-over-year, inflation was up 7.7 percent, down from 8.2 percent during the previous month.
This downward trend is good news. And when I review the week’s inflation and layoff headlines, I can’t help but notice the paradox.
Through automation and globalization, technology tamped down inflation for four decades leading into the pandemic. It has allowed us to work in new ways.
In many ways, technology has delivered on its promises of lower prices. But its other promise – greater productivity – remains elusive. In fact, productivity has been declining for a decade.
How can we resolve this paradox? MainStreet Macro will be on hiatus next week, but I’ll attempt to answer that question when it returns. Meanwhile, enjoy the holiday.