Why don't European companies innovate? It is common to blame expensive energy, high taxes, anti-growth politicians, interest groups, and green regulations.
But California has the same problems, and has created the world's most innovative companies.
Europe's problem is labor law. Compared with America, it's far harder to let workers go when a business doesn't work out.
worksinprogress.co/issue/why…
- It costs a large company roughly four times more to fire a worker in Germany or France than the US.
- German law requires employers to consider age, years of service, family obligations, and disability status when deciding who to lay off. Employees who would be least impacted by losing their job are prioritized for dismissal.
- German employees who take on a caregiving role are fully protected from dismissal for two years from the date they begin caregiving.
- Factory closures in Germany regularly lead to payments of over €200,000 per employee.
- French companies must be prepared to show a court that their financial results are struggling enough to make layoffs necessary.
- To avoid the difficulties of formal dismissals, many European companies entice workers to depart voluntarily, with payouts of up to four years' salary.
Taken together, a German worker is ten times less likely to be fired in a given year than an American worker. This high cost of firing makes failures more expensive. It pushes big European companies away from taking risks and leads them to concentrate on safe, unchanging areas.
Europe has the ingredients needed to succeed. Its citizens are educated and inventive; it has excellent infrastructure and the rule of law; and its culture is not that different from the one it had fifty years ago, when its companies were world-beating. If Europe wants to a Tesla or a Google, it only needs to make it cheaper for companies to fail. My new piece for
@WorksInProgMag.
