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03-06-2024 Newsletter: Reasons for Layoffs in the Current Environment

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If you are anything like me, I entered the financial services industry a few years ago with a naive sense of job security. From my personal experience, securing an investment banking internship in my junior year of college set me up for a full-time offer and launched the rest of my career. However, if the past year has taught us anything, it is that job security is unfortunately not guaranteed in any industry, and especially not in finance.

According to CBS News, excluding January 2023, the January layoffs in 2024 represent the highest number of job cuts announced in the first month of January since 2009. At the time, the U.S. economy was undergoing the Great Recession, which prompted 241,000+ job cuts in the single month of January. But, if we consider the job market today, the nation’s unemployment rate is near a 50-year low and wages are pulling ahead of inflation. So, why are major companies in tech, finance, media, and other sectors announcing layoffs that have continued to increase in size and impact?

As more young professionals start working in finance and adjacent industries, many people may be wondering why layoffs affect finance in the first place. Besides obvious reasons like cutting costs or performance-based layoffs, the greater market and developing trends play a large role in whether or not major firms decide to implement layoffs. Here we’ll go through a few of these reasons and what to keep in mind as you’re starting your career or moving across the industry.

 

Economic Downturns

While this reason may seem obvious at first, economic downturns are actually extremely nuanced. As mentioned above, the job market today is not what one would classify as a “downturn” in the traditional sense; yet, layoffs still abound for financial firms and other major companies. A more important indicator to look at is the probability of economic recession, as fear is a major driver in human decision-making. As companies anticipate an economic downturn, senior management becomes proactive, cutting resources where people are not absolutely necessary to keep the company running. In preparing for tougher times, companies can sometimes overdo workforce reductions, leading to large swings in hiring and layoffs and making it unpredictable for those wishing to work at these companies.

 

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Technological Advancements and AI

If you’re plugged into what is happening online, you’ve most likely seen memes about AI replacing many types of jobs that are currently performed by humans. The most common of these in business are consulting-related or perhaps simple functions in finance like quick calculations or formatting/Excel analysis. With automation enhancing the efficiency of certain job functions, jobs that require less specialized skills may be targets for layoffs. At the same time, some companies are realizing that AI actually enhances workflow for employees and is using it as a tool to become even more efficient with the same workforce/employees. So, while it will depend on the company, technological developments will definitely impact layoffs going forward. At the firm I work at, we have not been adopters of AI, including ChatGPT, given confidentiality and IT concerns. This may be an issue for many finance businesses given a leak in confidential information would be disastrous; however, eventually, these hurdles might be overcome by strict security measures, and when they are, layoffs could be coming for those who aren’t up to speed with AI.

 

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M&A Activity

The financial sector sees frequent mergers and acquisitions, especially among banks, private equity firms, and other types of companies. As banks merge or are acquired, such as J.P. Morgan acquiring First Republic last year, banks need to recalibrate their business strategies to achieve synergies. They may look to eliminate costs in places where there are now redundancies, and that might lead to layoffs in certain divisions within the new entity. Additionally, they may look to reduce expenses overall by performing layoffs rather than not increasing salaries for existing employees, as employee satisfaction for those who still work at the company will likely still be a priority.

 

Regulatory Changes

While those of us at the employee level are usually largely unaffected by regulatory changes, whether that be state or federal level regulation, these types of changes can greatly affect a larger company or business. For example, increased standards for compliance is one area where financial firms can face increased costs and attention. In doing so, firms may be forced to downsize to maintain profitability. Other regulatory-related areas may include stricter capital requirements or new financial reporting standards; whatever the case may be, a changing regulatory environment could certainly be cause for layoffs. The difficult part about this is that layoffs due to regulatory changes are largely out of your control. Staying informed about what regulation might be upcoming could be a way to keep posted on whether it would affect you or not.

 

Market Volatility

One of the biggest reasons for layoffs might be market volatility. The finance sector in particular is vulnerable to fluctuations in stock markets, interest rates, currency exchange rates, and a host of other variables that are determined by greater market sentiment. When these terms fluctuate, they can impact the profitability of businesses, leading to layoffs. For example, imagine you’re at a hedge fund that invests heavily in certain industries, and one day the stocks in those industries plummet and continue to suffer. The money lost from those bets would likely cause a huge hit to the profitability of the fund, and layoffs, perhaps even liquidation entirely, would be necessary to stay afloat.

 

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Layoffs can seem like they come out of nowhere, but in reality, several of the indicators we have discussed above can give you a good sense as to whether certain companies or sectors in finance might be at greater risk than others. At the same time, layoffs can quite literally come out of nowhere and seemingly have no connection to greater market movements, which could especially be the case in today’s world with an otherwise strong economy. Navigating layoffs can be scary if you are subject to one; Officehours has blog posts on how to navigate layoffs and resources to help you move roles within your sector or start a new career entirely. We are all in this together.

 

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