Software Dev Hiring was a ZIRP
Half the increase in demand for software devs came from a venture capital bubble
Summary
Abnormally low interest rates and another tech bubble drove frenzied demand for hiring software talent.
A number of IT placement and staffing firms started-up to fill this demand.
The return to normal interest rates and Generative AI will reduce demand for software talent and provide headwinds to placement firms trying to fill this niche.
Software talent, in demand?
Software development is expected to be one of the fastest growing occupations in the US.
The number of US software developers is expected to grow from 15% to 5.75M by 2032.1
Previously BLS projections vastly underestimated the demand for software developers. In 2012, the BLS thought there would be 4.5M2 people employed in this field, instead of the 5M we saw. This could mean software development is a safe and stable occupation.
Demand for software developers in 2022 far exceeded initial estimates, opening up the possibility that this is the new normal. The case for why software talent is in demand is clear: software ate the world, tech is in everything. This is mostly wrong.
Instead near zero interest rates drove stock prices up, venture capital investment, and an over heated market for software developers. The return to interest rate normality is having a deleterious effect on tech and tech hiring.
Zero interest rates over accelerated tech hiring
US Venture Capital funding tripled between 2016 and 2021 after 10 relatively flat/stable years. Funding went from $51B to $155B per year.
Employment in computer-related occupations (a proxy for software developers), increased almost 40% from 2016 to 2022 compared to growing only 30% from 2007 to 2015.
Wages for software developers were up 26% in the 2016 to 2022 period compared with the only 16% for the 2007 to 2015 time period.
Venture capital investing accelerated, and the rate of employment and wages for US developers followed.
Rapid tech hiring inspired a number of IT placement and staffing firms
Non-US developers benefited from this funding frenzy, too. A number of companies popped up to help US startups hire in Africa (Andela), Latam (Laskie), Asia (Remotebase), and Eastern Europe (Toptal). Often it was not just one or two companies, but several going after each geographic niche. This mini-boom was accelerated by covid-related remote work.
As interest rates rise, though, venture capital is drying up, companies are doing layoffs, and startups are going out of business. These factors reduce demand for developers.
Normal interest rates, venture capital declines, and layoffs
Interest rates went from 0% to 5%+
Venture capital funding fell 50% from 2021 highs.
More normal interest rates have led to layoffs and startup deaths.
US Federal Funds Rate, from 0% to over 5%
Venture Capital funding has decreased year-on-year and quarter-on-quarter
Technology layoffs by month - rates up, capital down, and layoffs up
More startups are shutting down - number of startup closures by quarter
The net effect of the changes in interest rates and venture capital is a decrease in demand for tech workers.
Generative AI improves productivity, at the expense of some traditional jobs
Early indications are that Generative AI can improve productivity by 40% or or more. According to early research, some segments of knowledge workers are already seeing a decrease in job opportunities and in wages. This is more pronounced in outsourced, freelance work rather than full time, US employees.
If nothing else, the productivity gains that come from Generative AI could be another headwind to IT hiring.
How long to get back to funding levels?
Venture capital bubble cycles are not new.
After the dotcom bubble, it took about 20 years for venture funding to return to its previous levels. The Great Financial Crisis and Real Estate booms likely contributed to this delay.
Generative AI is a huge wave, the magnificent 7 tech stocks are still hitting highs and driving growth. But it’s reasonable to assume that venture levels will take awhile to recover. This implies that hiring within the technology industry will take awhile to recover.
Looking ahead and the coming consolidation wave
Rates are back to normal, venture capital investment is down, and startup deaths are up. As startups go out of business and tech hiring slows, look for consolidation within the IT staffing and placement space. These consolidates firms will emerge stronger and more profitable. Fortunately, new opportunities are opening up, particularly in Generative AI serving recruitment and software developers. Companies will hire less, but the need to grow and be productive does not change.
https://www.bls.gov/news.release/pdf/ecopro.pdf
https://www.bls.gov/opub/mlr/2013/article/occupational-employment-projections-to-2022.htm