Modelling The Effect Of Twitter Layoffs

Modelling The Effect Of Twitter Layoffs

As the risk for potential recession increases, we have witnessed companies, primarily in the tech sector resorting to layoffs. The layoffs started with Twitter, followed by Meta and Amazon. Elon Musk has fired 50% of Twitter’s employees after he assumed control. The layoffs started with the leadership team and are now spreading to sales and marketing teams. What has enraged employees is how they are fired, the severance pay given and how the existing employees are asked to work for long hours. The “Great Attrition” topic across the corporate boards has shifted to “Great layoffs”. In this post, I provide my insights on whether these measures taken by the companies will come to haunt them when the economy recovers and then follow it by modelling the effect of Twitter layoffs using the fundamental principles of economics.

The Concept Of Job For The Younger Generation

Mckinsey came up with a report this year that 40% of employees plan to quit their jobs, shift their careers, or switch from full-time employees to freelancers. Money was not the only factor behind this great resignation wave. The other factors include “Relevance of work” and “flexibility to work from anywhere”. The new generation wants personal control of how to work and where to work. While talking to a few CEOs over the weekend, some of them viewed these preferences as a short-term phenomenon that emerged during the pandemic and will halt once the fear of recession looms when the same employees will become less demanding.

When I asked a few of them about the effect of asking the employees to move to the office either due to the fears of the employer that they are moonlighting or working from the office will prevent them from doing, some of them said that there is a quiet rebellion among the employees when asked to work from the office on all the days. Thus, employees have adopted a hybrid working model where employees can work from home for two days a week, giving them adequate flexibility.

While many companies blame this sudden shift in working culture on the pandemic and the rise of virtual meetings (Zoom and Teams), in my view, digitalization has played a role in how we look at ourselves. During my parent’s era, individual choices were the product of the societies. Society defined individual identity, and people had options to fit in with society or get abandoned. Digital technologies changed this trend and kicked off the “Me” generation. Employees want to sit at the centre of their world and customize their work to their tastes and preferences. If they are unable to, then they are ready to quit. Thus, when employees are robbed of their preferences, they will not like it, and i don’t think this mindset will change even during a recession.

Modelling The Effect Of Twitter Layoffs

In the earlier section, i provided my view on the evolution of jobs and the shifting perspective of employees. So let me also explain why companies fire employees. For instance, in Twitter’s case, Musk is using the threat of layoffs as a motivational tool to transform Twitter. So when Musk fires Twitter employees, the reason is that their performances are unsatisfactory; however, Musk must define what constitutes unsatisfactory to the affected employee.

I model the current scenario from the employee perspective on the effect of layoffs using the fundamental principle of economics.

Here I don the role of a Twitter employee. As a Twitter employee, i am promised that if i work hard, then the probability of me getting fired is 0%.

I assume that the cost of working hard is $50, and the probability of my layoff is 0%.

Thus, if i do not work hard, i will get fired. Therefore, I assume the probability of layoff as P where P<1.

As a Twitter employee, i earn a salary of “W”. If i get fired, i have to search for another job or look at a profession, and i assume that the salary from the new job or profession is “N”.

My payoff to working hard is W-$50.

If i don’t work hard, i get fired, and when that happens with a probability P, i find a new job that pays me “N”.

Thus my expected payoff for not working hard is (PN) + (1-P)W.

As a Twitter employee, i will work hard if W-$50 > (PN)+(1-P)W.

Alternatively, if P*(W-N)>$50 where

P is the probability that i will get fired and

(W-N) is the cost associated with getting fired?

Thus, P*(W-N) is the expected cost of not working hard, whereas $50 is the cost of working hard.

As a Twitter employee, i will work only when the consequence of not working hard exceeds the cost.

However, if P is higher, it implies more employees get fired or quit. Thus, as a Twitter employee, i think that my effort to work hard does not reward me enough; thus choose to either get fired or leave.

On the contrary, if Twitter increases my salary from W to W’, then i get motivated to put extra effort into retaining my job.

For instance, if i get fired from Twitter, and i easily find a job that pays me a salary “W”, my incentive to hold on to my job is minimal. In another scenario, if i land a job where i get better working conditions than Twitter, like adequate flexibility, less stress or better work, then my incentive to retain my job is less. In the Twitter situation, Musk has changed the existing work conditions by removing flexibility to work from anywhere to clocking 60 hours a week, making Twitter no longer friendly to the employees as it was earlier. In addition, Musk is not compensating the employees by increasing their salaries; on the contrary, he is using the cloud of recession as a weapon of fear for employees to stick to his new approach.

Ford Motors, in 1914, increased their worker’s wages from $2.3 to $5 per day and, at the same time, increased the working hours. This change in the wage policy improved workforce productivity because workers knew they didn’t have a better alternative. As time passed, best companies introduced a combination of non-wage benefits and monetary compensation to reduce attrition and improve productivity.

Final Thought

The growing disconnect and loss of trust between employers and employees are a matter of concern. As what defines a job has changed post-pandemic, employers must recognize that this mindset will not disappear even if there is a recession. Employment agreements are akin to the principal-agent relationship, where the principal (employer) hires an agent (employee) to take action that affects the payoff to the principal. Agency problems arise when the agent’s and principal’s interests diverge. When that happens, the firm’s value declines.