Eurosclerosis at 40: Labor Market Institutions, Dynamism, and European Competitiveness
- olivierccoste
- 28 sept.
- 2 min de lecture
By Benjamin Schoefer
Abstract
This paper repositions Europe’s labor market institutions as drivers of the transatlantic gap in macroeconomic performance. Institutional diagnoses were prominent in times of high European unemployment in the 1980-90s. But interest waned as joblessness fell—even though the decline was uneven, precarious work arrangements have grown, and labor markets remain largely unreformed (unlike product and financial markets). Yet, rigid labor market institutions continue to matter because they can stifle labor market and business dynamism: Europeans switch jobs much less frequently, and restructuring is much rarer. Recent research argues that such immobility impedes wage and productivity growth. Moreover, this low dynamism contributes to Europe’s specific underperformance in tech, R&D, disruptive innovation, ICT adoption—where creative destruction requires fluid reallocation. This institutional labor market perspective on European competitiveness complements prevailing diagnoses focused on capital and product market fragmentation. Tight labor markets, lower unemployment, and shrinking labor supply might keep this nexus timely
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In the same spirit, Coatanlem and Coste (2024) provide a rich collage of evidence for European EPL and labor market rigidities entails prohibitively high “cost of failure” for innovative ventures. The authors argue that restructuring costs are dramatically higher in Europe compared to the US due to severance pay, deals struck with works councils, buyouts, or lengthy negotiations, or advance notice requirements. They furthermore argue that this mechanism accounts for lower expected returns on European tech companies and make the case that VCs notice and act on this return disadvantage by restricting funds—and that these costs matter not just for small but in expectation also for large ventures once projects were to grow. Coste (2024) is a book-length account of this idea, including intriguing case studies. These two intriguing collections also engage with alternative mechanisms such as capital market integration and deepening.
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