Europe's rigid labor markets are an economic death sentence

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Why has Europe slowed down relative to the US? I have my hobby horse about tech regulation and horrible antitrust laws, but I don’t think those are THE biggest reason. Instead, I agree with a recent piece by Pieter Garicano that points to labor market regulations. The timing and the magnitude fit much better than for other theories. See also their podcast discussion of it.Lots of places have regulations. As the piece points out, California has lots of regulations. Labor regulations—specifically those that generate rigidity, compared to like labor safety regulations—are fundamentally different.This Substack is reader-supported. To receive new posts and support our work, consider becoming a free or paid subscriber.When it’s hard to fire workers, you never hire them in the first place. That’s the big idea. Yes, it’s super simple.Still, in this newsletter, I want to augment Garicano’s piece a bit by going more explicitly through a basic theory to show the problem with rigid markets. There’s a bit more to it than “don’t hire since you can’t fire.”Don’t worry; there’s no math this week. But we will work through a model, one that recognizes that workers become a type of “capital” stock. For businesses, stocks are slow to adjust. Worse than that, businesses are very hesitant to adjust their stocks (read labor force) in the face of uncertainty.The Everything is Housing TheoryTo explain the theory, let’s first talk about something a bit more standard first: housing.When demand for housing rises, both prices and quantity adjust. Prices jump, construction ramps up. That makes sense. Th…