The Lopsided Hiring Market. Why Do We Have Layoffs And A Talent Shortage?

How can one side of the economy be laying people off while another side is dealing with a talent shortage? Let me explain what’s happening under the covers from a macro perspective and how you can prepare.

Companies hire because they are growing or expect to grow. Over the last 7 years, growth has been easy. The economy grew so fast that there was plenty of business and investment to go around. That’s changed because inflation is rising.

The Federal Reserve is responding by increasing interest rates. The goal is to slow down growth by limiting access to new funds. The economy is slowing, and growth isn’t easy anymore. When businesses are flush with cash, they can invest in multiple directions. If some of those investments pay off, they continue to grow even when a significant number of initiatives end up failing.

Companies are spending differently. For some, the emphasis has shifted to efficient growth. Others are in survival mode because they assumed that easy growth would continue for much longer. Businesses that aren’t profitable, including many startups, are having a harder time raising new money, so they need to stretch what they have now.

They’re freezing hiring, and some are starting to do layoffs to get to profitability or close enough that their remaining cash can get the business through this downturn. Many profitable companies are seeing lower margins due to inflation. Those companies need to reduce costs to keep up profit margins, leading to hiring freezes and layoffs.

Companies are re-evaluating how they invest in new opportunities. Instead of chasing new markets and customers, they need to refocus on their core business. That’s the move towards efficient growth.

Competition forces them to defend their main revenue streams, and they are choosing to focus on the areas that are easiest to protect, where they have competitive advantages. New initiatives and expansion plans are being deprioritized so the business can put all its resources into competing on its strengths. Non-core business units are on the chopping block.

On the talent shortage side are 3 different types of businesses: Those with piles of cash, high margins, and rapid growth even in the downturn. They’re continuing to hire to take advantage of their current opportunities. For them, the built-up demand from years of talent shortages will take some time to work through.

What Comes Next?

Discretionary spending will decrease. Inflation means people must spend more money on the things they really need. There’s less left over for vacations, TVs, clothes, and other items they don’t have to have right now. Businesses in those areas will see a slow down in a few months.

Those businesses will join the list of companies cutting back to refocus on their core business. This second wave of layoffs will hit a colder job market that has worked through pent-up demand. The unemployment rate will rise, and consumer spending will slow further.

The cyclical nature of downturns leads to iterative slowdowns until the economy finds a new equilibrium. Some companies going through a round of layoffs right now or planning one in the next couple of months will do multiple rounds of cutbacks in response to each cycle.

In the final phase of the slowdown, even the companies with large cash piles and high margins will put a freeze on non-essential hiring. At the lowest point, the job market pendulum will swing back, and more people will be looking for work than there are companies hiring.

What Can You Do to Prepare?

The companies hiring now are the best places to find stability. Look for piles of cash, high margins, and/or rapid growth. Move to teams that support the strongest revenue streams where the business has the strongest competitive advantages and the deepest commitment.

Now is an excellent time to reskill into a more secure job with higher demand. Companies cutting non-core teams will allow people to transfer into hard-to-fill roles in core teams.

If you have a side hustle or small business you’ve been developing, that’s a good hedge against a sudden layoff. Make a plan to turn side gigs into an income replacement. That’s how my business started in 2012. If you prepare a contingency plan, which I didn’t, you’ll have options and be better positioned to find a quality role or grow the side gig.

Most of all, don’t panic. This isn’t looking to be an apocalyptic slowdown, but with the way the last 2 years have been, it’s better to be prepared. There are bubbles in the economy and global forces that could deepen this downturn. Stable companies and core teams will ride out even a prolonged downturn. Reskilling incrementally increases job security and career resilience no matter what comes next.