Employment Protection Laws and Innovation: A Stifling Conundrum in Europe
Marc Lemaître, head of the European Commission’s directorate for research and innovation, posits that Europe’s stringent employment protection statutes may serve as a hindrance to innovation.
“The pivotal question is whether Europe sufficiently embraces creative destruction,” Lemaître remarked at an event co-hosted by the Commission and the OECD on November 17. His comments echoed the theory that economic progression ensues when novel, innovative technologies and business frameworks displace outdated practices.
“Recently, some commentators have highlighted the challenges Europe faces in reallocating resources, attributed to our employment protection laws that escalate the costs associated with restructuring to prohibitively high levels,” he elaborated.
This elevated cost “could elucidate why Europe appears hesitant to engage in disruptive innovation compared to its global counterparts.”
This discourse was further echoed two days later by Pascal Lamy, the former director-general of the World Trade Organisation and chair of the high-level panel advising the Commission on the Horizon Europe programme.
Speaking at the European Business Summit on November 19, he identified the exorbitant costs associated with failure in restructuring as an impediment to disruptive innovation.
Lamy referenced recent research from Bocconi University, which posits that employment protection laws are a “first-order determinant” of disruptive innovation and substantially account for the technological disparity between the United States and Europe.
Researchers Yann Coatanlem and Oliver Coste disclosed that average restructuring costs in the US amount to approximately seven months’ salary per employee, contrasting starkly with 31 months in Germany, 38 months in France, and a staggering 52 months in Italy. Switzerland and Denmark are notable anomalies, at 2.5 and 3.3 months, respectively.
Focusing on the technology and biotechnology sectors, the authors discerned a pronounced negative correlation between restructuring expenses and business research and development intensity.
“These figures elucidate the prevailing reluctance to venture into the unknown,” Lamy asserted. He suggested that this issue could be addressed in the Commission’s forthcoming proposal aimed at streamlining company formation across the EU, referred to as the 28th regime.
The Bocconi researchers advocate for the adoption of the Danish “flexicurity” model, which harmonizes labor market flexibility with robust social protections, including ample unemployment benefits and retraining initiatives.
They propose reforming employment protection legislation specifically for high earners, such as the top 10%, arguing this would catalyze innovation while preserving the European social fabric.
“The personnel affected by substantial restructuring in innovative enterprises are primarily highly skilled, well-compensated, and seldom face unemployment,” they contend.
However, the nexus between employment protection and innovation is not simplistically dichotomous. Prior investigations have indicated that laws safeguarding employees from unjust dismissal may, in fact, foster innovation.
A Global Context
The challenges confronting Europe are not confined to the continent. Productivity growth has experienced stagnation across numerous economies worldwide over the past three decades.
Research from the OECD underscores that the salient characteristic of this productivity growth deceleration is the widening chasm between leading firms and their least productive counterparts, as noted by Jerry Sheehan, the OECD’s director for science, technology, and innovation, during the November 17 symposium.
“This trend is particularly alarming as it signifies a decline in innovation activity and a reduction in technology diffusion among the least productive firms,” he articulated.
Additional indicators signify a waning of creative destruction in advanced economies, marked by increased market concentration, a decline in firm entry rates, and diminished employment churn among young firms.
“When fewer new enterprises infiltrate markets, and established companies encounter less competitive pressure, the diffusion of innovation falters, resource reallocation decelerates, and productivity enhancements fail to permeate the broader economy,” Sheehan warned.
However, he asserted that policymakers possess the capacity to enact measures aimed at bolstering innovation, enhancing technology diffusion, and fortifying competition.
A paramount priority should be amplifying private research and development expenditures. The EU currently allocates less than 2.3% of its GDP to R&D, significantly trailing its target of 3% and the US at nearly 3.5%.
This gap is primarily attributed to lower private spending levels, as public investment rates remain comparable in both regions.
Commitment to Cohesion
Lemaître also broached the dichotomy in research policy between exclusively funding exemplary projects, irrespective of their location, and striving for geographical equity, thereby ensuring that smaller nations do not get marginalized.
He asserted that these latter objectives, which reflect the EU’s overarching cohesion policy, remain pivotal to the Commission’s considerations.
“Our responsibility extends to guaranteeing that innovation and opportunities are accessible beyond a select few prominent firms or favored regions,” he stated.
He emphasized that innovation should propel a “stronger, more inclusive, and more sustainable economy that benefits all facets of society.”
Source link: Sciencebusiness.net.
