If you've been on the lookout for a software engineering job lately, you may have already noticed that salaries have suffered a noticeable decline.

This general trend contrasts how compensation plans for developers have been structured in the last decades. As such, for years, software engineers have enjoyed stability and highly competitive wages. Today, they have to deal with a different problem: lower salaries. Software engineer salaries are dropping by 9%–15%, depending on the market—something that hasn't happened in at least 20 years. Even top engineers from major tech firms are now accepting offers up to 30% lower or struggling to secure positions.

This article aims to explain the reasons behind the software engineer pay cuts and how they affect the tech space. We'll look at different reasons why salaries are going down, which is surprising considering there are plenty of voices expressing concern about an IT talent shortage.

Demystifying the talent shortage

With AI either already changing or promising to impact almost every industry, there has been much talk in the media and among HR circles about the huge gap between the demand and supply of tech workers. However, just as the search for techies surged, so did the supply of jobseekers. Different sources say the software developer count has increased by 15% or 20% since 2020. And this new jobseeker supply is not from a single market—workers come from all over the world and don’t even need to relocate to carry out their duties.

The feeling of a saturated tech job market has spread among software engineers, and for good reason. The rise of AI, recent layoffs, increased interest in the field, and a globalised workforce all contribute to this perception. Still, the impact isn't uniform across all positions. Junior and frontend roles are seemingly most affected, as there's still a good pool of candidates for entry-level positions. This naturally translates to salaries for these roles not being quite as competitive as they once were.

Even so, recruiters noted that there is still a marked shortage of certain high-demand skills, such as specialists in cybersecurity, cloud computing, data, and artificial intelligence. Online reports point out that Bloomberg’s newsroom said that IT managers, information security analysts, web developers, and database administrators have the best job security in the tech industry, although they offered no clear data points to back their claims up.

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Why software engineer salaries are falling

As we said, the tech sector is experiencing serious salary cuts. Users on Reddit are confirming it. One user asked: “I've heard horror stories of people taking 50% pay cuts just to stay employed, but that has to be the extreme exception, right?” Only to be answered: “Yes, I went from 200k to 160k.”

Faced with these concerns, we did some research. Here are some reasons that explain why software engineers’ wages are being pushed down:

1. Overhiring consequences

One of the main allegations against Big Tech was that they went on a hiring spree during the pandemic, and that could not hold up their ambitions. This is fairly accurate for companies like Alphabet, which kept hiring while other companies were firing (thus making the contrast even more stark). Not only did they keep hiring, but they also offered much higher salaries (20–30% greater than usual!) to attract talent and secure it for their ranks. Those insatiable hiring practices eventually led them to a place where they had to lay off numerous people and bring down salaries. Take a look at Google's statement regarding this situation:

“Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today.”

Some recruiters caught this clearly early on, noticing that the supply of tech skills was far surpassing demand for the first time since the pandemic hit.

Predictably, this hiring binge didn't last. Soon, tech salaries and contractor rates dropped by 10-15% in 2023 compared to the previous year. There were a few reasons for this. Some companies hired too many people at salaries they couldn't cope with in the long run. When the economy slowed down, they had to lay people off to fix this imbalance and make their budgets work. Also, as the excitement about remote work wore off, companies didn't have to compete as hard for talent, so salaries went back to normal levels.

2. Massive layoffs

Over 240,000 tech jobs were lost in 2023, surpassing the previous year's figures by more than 50%. Besides the layoffs that followed the overhiring frenzy, this wave of layoffs has other key factors driving it:

1. The economic slowdown and market pressures: The tech sector faced headwinds from global events such as the Russia-Ukraine conflict and the resurgence of the Covid-19 pandemic. These challenges led to an economic slowdown, prompting companies to implement cost-cutting measures, including layoffs. Additionally, investors have been exerting pressure on tech firms to improve profitability, leading to workforce reductions as a means of reducing expenses. Moreover, the major four banks have put IT projects on hold, cut contractors, or moved them to lower-paid, but more secure permanent jobs.
   
   
2. Shifting priorities and redundancies: As the tech space grows, companies are adjusting their focus to different areas, resulting in redundancies in certain roles and departments. This shift in priorities has caused the need for workforce restructuring and downsizing.

The (still ongoing) aftermath of these layoffs has had a significant impact on the tech job market. Due to slower growth and lower revenue, companies are using market data to justify lower salary bands as there are fewer available positions and more competition for available jobs. Because of this, people who have been laid off might have to accept jobs that pay less or get demoted to positions with smaller salary packages.

In addition, the narrative of experienced devs being laid off and subsequently accepting lower-paying positions has led to an overall drop in average salaries. Companies, faced with economic constraints, are becoming more selective in their hiring processes, raising the bar for experience and skill requirements for higher-paying roles.

3. Hiring freeze

The tech sector's current hiring freeze is due to a combination of economic pressures and strategic shifts within companies. Lockdowns and a recession have forced firms to tighten their budgets, making it difficult to secure capital for new hires. The decline in venture capital funding has worsened this economic downturn, leading companies to adopt a more cautious approach to hiring.

As companies reduce costs, they are reluctant to hire more workers. Instead, they are focusing on stabilising their financial positions. As a result, jobseekers may find fewer employment opportunities and limited wage growth.

4. Immigration and remote work

Immigration and remote work have played a big role in pushing down software engineers' salaries too. With fewer immigration barriers—migration returned, and a visa backlog cleared—and remote work options, more people are entering the tech job market, leading to stiff competition for jobs. This surplus of talent, combined with layoffs at tech companies due to less funding, means software engineers have less power to negotiate their pay, causing wages to drop.

On top of that, companies now adjust salaries based on where employees live, reflecting local living costs. This means they can offer lower salaries in cheaper areas, which brings down the overall pay for everyone. Also, with more people wanting remote jobs, especially in expensive places like San Francisco, companies don't feel the need to offer high salaries anymore. This trend is seen globally, including in countries like Australia, where immigration slowdowns during the pandemic increased the supply of workers, leading to lower wages in the tech industry.

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5. AI

With AI becoming more capable of performing tasks traditionally done by engineers, companies are questioning the need for high-paid human developers. If AI can accomplish the same tasks at a fraction of the cost, companies may opt for this cheaper option.

As AI technology grows, more software development tasks are expected to become automated. This could lead to a decrease in demand for human software engineers and, therefore, lower salaries. The need for large software engineering teams may diminish, resulting in fewer job opportunities and potentially reduced wages for those in the field—particularly for entry-level tasks. In turn, this should result in more roles for Machine Learning and AI engineers.

It’s still too soon to judge how far away the AI ripples will be felt, and it’s to be seen how much the current strain of AI tools actually kills programmer jobs. Some companies are already advertising themselves as 100% LLM-free, suggesting there’s a market for workers who actively steer clear of AI. Meanwhile, a story has surfaced revealing that Amazon has been using hundreds of workers in India to operate its AI-driven, cashier-free stores, which suggests even the most advanced companies still need to get a firm grasp on AI. 

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In any case, it’s a matter of falling on the side with a net profit. In 2020, years before ChatGPT, the World Economic Forum estimated that, by 2025, 85 million jobs would be killed by “machine labour” (their wording for AI). Later in the same report, they claimed that AI would create 100 million jobs in the same period. Depending on which sector you’re in, there might be more to win than to lose.

What to expect from software engineer salaries?

In the tech industry, things may feel uncertain right now, but the future for software developers still looks promising in the long term. Even though there are ups and downs in the job market and pay rates, the need for skilled software engineers isn't going anywhere. As technology continues to advance, we'll keep needing experts to build and protect our digital systems, especially in areas like cybersecurity, AI, and cloud computing.

Keep in mind that during times when companies are cutting back or laying off staff, where you work and how experienced you are can affect how much you get paid. While layoffs and salary pressures are felt across the industry, the impact varies based on factors such as the size and financial stability of the employing company.

Along with that, it’s worth noticing that FAANG salaries do not represent the industry standard. Although these tech giants offer competitive compensation packages, most companies hiring software engineers are not industry giants. Smaller firms, in particular, may not match the top-end compensation of FAANG companies, but this does not necessarily mean a decrease in wages across the industry. This is very well explained by the trimodal salaries model, which says that salaries for software engineers have three statistical modes (in a graph, they look like three distinct spikes). This model explains how comparing startup–FAANG wages can be misleading.

So, while the job market is challenging, the demand for skilled software engineers remains strong.

Get a job as a software engineer in Germany and Europe

Since companies are being very careful about their finances, non-inflated salaries are likely to translate to periods of stability. This means it’s still a good time to get a job as a software engineer. One of the places you can start looking at is our platform. At WeAreDevelopers, we’re committed to helping software engineers find jobs at top European firms. Join us to learn about our job listings, check our job board for the latest available opportunities, and land a job that pays well and promises stability. Good luck!