Eurosclerosis at 40: Labor Market Institutions, Dynamism, and European Competitiveness

This paper explores a repositioning of Europe’s labor market institutions as potential 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 might 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 might contribute 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.