Europe’s labour market stagnation: An untapped source of growth

In a sharp and timely article, The Economist turns the spotlight away from Brussels’ grand strategies and lofty industrial policies, and onto something far less glamorous but potentially transformative: Europe’s labour markets. While the public debate has been dominated by Mario Draghi’s calls for a stronger single market, deeper capital integration, and heavy investment in innovation, the piece argues that an overlooked driver of growth lies in boosting job mobility. The message is clear—Europe’s problem is not simply money or technology, but how people move within its workforce.

At the heart of the argument is Europe’s longstanding attachment to stable, long-term employment. One in four Europeans has worked at the same company for more than 20 years, compared with just one in ten Americans. What once looked like a strength—loyal, highly trained employees—now risks becoming an obstacle. As Europe faces mounting competition from the U.S. and China, as well as structural pressures from ageing populations, rigid labour markets could stifle the very innovation and dynamism the continent so desperately needs.

The article highlights an important paradox. For decades, Europe struggled with high unemployment, which peaked at nearly 12% in 2013. Reforms since then, including making hiring and firing easier, have brought joblessness down to below 6%. That success, however, has masked a deeper issue: while more Europeans are working, they are not moving between jobs often enough. This lack of fluidity hinders the diffusion of new ideas and technologies, limits wage growth, and slows the ability of more productive firms to scale up.

Scholarly research reinforces these concerns. Niklas Engbom of NYU shows that older workers, in particular, are less likely to switch employers—meaning the problem will worsen as Europe ages. Antonin Bergeaud of HEC Paris adds another layer: when workers are tightly bound to firms, companies themselves become less willing to take risks on new technologies, focusing instead on incremental improvements. This creates a vicious cycle of conservatism at exactly the moment Europe needs boldness.

So what can be done? The Economist outlines a series of pragmatic reforms. Benefits like pensions and severance pay should be made portable, breaking their dependence on tenure. Wage-setting arrangements tied to years of service could be loosened, encouraging workers to seek opportunities elsewhere. Unemployment benefits could be extended to those who quit voluntarily, recognising that job-switching often leads to better matches and higher productivity. Finally, subsidies that encourage firms to hoard labour—such as furlough schemes—should be restricted to moments of genuine crisis.

Interestingly, the article also suggests that the problem is not just structural but psychological. Research by Simon Jäger of Princeton shows that German workers dramatically underestimate the wage gains available to them by switching jobs. If employees expect only a 1% raise rather than the 10% on offer, they are unlikely to move. This implies that part of the solution could be as simple as awareness campaigns or “active labour-market policies for the employed,” as one economist quips.

The piece ends by widening the lens: labour-market rigidity interacts with Europe’s broader challenges in housing and finance. Expensive, immobile housing keeps workers tied to low-productivity regions, while underdeveloped capital markets prevent startups from scaling. Job mobility alone will not solve everything—but it is a vital piece of the puzzle.

By Vugar Khalilov