The Price of Security
Pieter Garicano's essay for Works in Progress offers a focused, data-rich argument about why Europe has failed to produce companies like Tesla, Waymo, or even a competitive electric vehicle program from its incumbent automakers. The thesis is straightforward: European labor law makes failure so expensive that companies rationally avoid the kinds of risky bets that produce breakthrough innovations. It is a compelling argument, though not an unassailable one.
The article opens by dismissing the usual suspects. High energy prices, expensive housing, excessive regulation, heavy taxation -- these are all real, but they apply equally to California, which nonetheless birthed Tesla and hosts Waymo. Government research spending is actually higher in Europe than in America. The real differentiator, Garicano argues, is the cost of unwinding a failed experiment:
According to a rough estimate by Olivier Coste and Yann Coatanlem, a corporate restructuring in Germany and France costs companies the equivalent of 31 and 38 months of salary per employee laid off, putting all of the above costs together. In Italy, this is 52 months. In Spain, it is 62 months. In the United States, the cost per employee is just 7 months.
Those numbers are staggering. A Spanish company faces nearly nine times the restructuring cost per employee that an American one does. At those ratios, the calculus of experimentation changes fundamentally. Every speculative project carries an implicit insurance premium that American competitors simply do not pay.
Volkswagen as Cautionary Tale
The essay's most devastating section traces Volkswagen's slow-motion collision with the electric vehicle revolution. The company's former CEO Martin Winterkorn dismissed electric vehicles in 2013. His successor Herbert Diess tried to pivot, threw $50 billion at the effort, and produced the ID.3 -- a car plagued by software problems, developed by a company whose leadership viewed software as inferior to traditional manufacturing. Volkswagen's in-house software team was overwhelmed:
In the months leading up to the launch, the team was finding up to 300 new bugs a day.
The punchline arrived in June 2024, when Volkswagen effectively admitted defeat and paid Rivian up to $5 billion for access to its software. One of Europe's largest industrial companies had to license core technology from a small American startup. And Diess, the reformer who had warned that Volkswagen was falling behind Tesla, was fired in 2022 after clashing with the works council over factory closures. The institutional immune system rejected the change agent.
The Volkswagen story illustrates something deeper than labor costs alone. Since 1994, the company has guaranteed German factory jobs, the result of a negotiation with the union that swapped layoffs for a four-day workweek. Three decades later, getting hired at Volkswagen remains effectively a lifetime appointment. When the works council blocked the closure of three factories in 2024 and secured a ban on compulsory redundancies until 2030, it was not acting irrationally within its own incentive structure. It was doing exactly what the system was designed to do.
The Counterarguments Garicano Understates
The essay's central claim is powerful, but it deserves more friction than it receives. Several counterpoints warrant consideration.
First, the article treats Tesla's market capitalization as evidence of innovation leadership, noting it is "worth more than the next nine largest carmakers in the world put together." But market cap reflects investor expectations about future profits, not current engineering achievement. Tesla delivered roughly 1.8 million vehicles in 2024. Volkswagen Group delivered over 9 million. BYD, operating under China's labor regime -- which is hardly a model of at-will employment -- has become the world's largest electric vehicle maker. The innovation gap may be real, but Tesla's stock price is a poor ruler for measuring it.
Second, the essay's comparison with California is more complicated than it appears. California benefits from network effects in talent, venture capital, and institutional knowledge that have compounded over half a century. These agglomeration advantages are partially independent of labor law. Israel, South Korea, and Taiwan have all produced significant technology companies despite labor protections that are, in many cases, stronger than those in American states.
Third, the article's framing of the problem as primarily about firing costs risks obscuring a broader institutional failure. European companies have also suffered from fragmented capital markets, twenty-seven different regulatory regimes, language barriers to labor mobility within the EU, and a cultural tendency among established firms to optimize for consensus rather than speed. The German Sozialauswahl is a real constraint, but it operates within a much larger ecosystem of friction.
The Flexicurity Escape Hatch
Garicano's most interesting contribution is not the diagnosis but the prescription. Rather than arguing that Europe should adopt the American model wholesale, the essay points to Denmark, Austria, and Switzerland as proof that worker security and employer flexibility can coexist:
Denmark uses a flexicurity model where employers can almost fire at will, but workers can draw on generous unemployment insurance which covers up to 90 percent of their previous income for two years. In exchange for reduced job security, the Danish government spends two percent of GDP on subsidies and other incentives for retraining and rehiring the unemployed.
The data supports this. Denmark has produced Novo Nordisk, currently one of the most valuable companies in the world. Switzerland hosts Roche, Nestle, and Novartis. These are not just large companies but genuinely innovative ones operating at the technological frontier. The correlation between flexible labor markets and innovative output, at least within Europe, is real.
The essay's most provocative suggestion is that reform need not be universal. Since innovation disproportionately depends on elite talent, even allowing workers above the 90th percentile of income to opt out of employment protection legislation could shift incentives meaningfully. A German worker at that threshold earned about $80,000 per year in 2022, compared to $147,000 in the United States. Targeting reform at high earners might be politically feasible in ways that wholesale deregulation never will be.
The Historical Irony
The essay closes with a historical parallel that reframes the entire argument. In the 1880s, the French company De Dion-Bouton invested heavily in steam-powered automobiles, failed, pivoted to experimental petrol engine technology, and by the early 1900s became the world's largest automaker. Europe was once the world's laboratory for exactly the kind of high-risk, high-reward experimentation that now happens primarily in the United States and China.
Garicano draws a sharp analogy between modern employment protection and feudalism, noting that feudal serfs could not leave their lords but lords also could not turn out their serfs:
It would be only a little fanciful to describe Europe's current system as 'one-way feudalism'. Employees have the right to leave their employers, just as they do in all free societies. But employers have only a tightly circumscribed right to leave their employees.
The comparison is deliberately provocative, and historically strained -- modern European workers enjoy protections that feudal serfs could not have imagined. But the structural observation holds: when neither party can exit an arrangement, both parties optimize for stability over experimentation.
Bottom Line
Garicano has written one of the clearest articulations of a specific, testable hypothesis about European economic stagnation: that the cost of failure, driven primarily by labor law, has made European companies rationally risk-averse in an era that rewards radical bets. The argument does not explain everything -- it cannot account for BYD's rise in a non-American labor regime, or for the decades in which European companies innovated brilliantly under these same constraints. But as a lens for understanding why Volkswagen paid Rivian $5 billion for software it should have built itself, or why Nokia spent more on severance in one year than many startups raise in a lifetime, the failure-cost framework is hard to beat. The flexicurity alternative deserves more attention than it gets in European policy debates, precisely because it offers a path that does not require Europeans to become Americans.