When thinking about what makes an economy flourish, many of us tend to focus on the success stories of innovation and growth. After all, success stories involve an element of risk, which means a chance of failure. When it’s more expensive to fail, then avoiding the risk of failure–by avoiding innovative but risky business choices–starts to make sense. Yann Coatanlem and Oliver Coste put some meat on the bones of this idea in “Cost of Failure, Disruptive Innovation and Targeted Flexicurity: More evidence supporting targeted reforms” (Institute for European Policymaking at Bocconi University Working Paper, November 2025).
The authors focus on the situation of a large company that took a business risk that did not work out, and wants to restructure significantly–which in turn involves the costs of laying off a large number of employees. They have data on 250 such restucturings across a number of European countries and the United States. For each major restructuring, they go through financial and government reports to estimate the costs of laying a worker off, expressed in terms of “months of average employee compensation.” Thus, the illustrative figures show that in Germany, each layoff cost 31 months of average employee compensation; in France, 38 months; in Italy, 52 months; and in Spain, 63 months.
In comparison, when a similar exercise is carried out for US firms, the average cost was 7 months of employee compensation.
Here’s a concrete US example:
In the United States, the responsiveness of tech companies to a technological shock such as the unexpected success of ChatGPT is quite staggering. OpenAI released ChatGPT to the public on 30 November 2022. This breakthrough AI solution reached 1 million users within five days and 100 million users within two months — taking even the most seasoned stakeholders in Silicon Valley by surprise. The industry’s reaction unfolded within weeks: On 18 January 2023, Microsoft announced 10,000 layoffs, representing 5% of its workforce. The restructuring plan was completed by end of March 2023. On 20 January 2023, Google followed with 12,000 layoffs, or 6% of its workforce. The U.S. based employees were notified individually (by email) on the same day. On 14 March 2023, Meta announced 10,000 additional layoffs — a second round following the 11,000 job cuts announced on 9 November 2022 — bringing the total reduction to approximately 25% of its workforce. Most of the restructuring plan was completed by May 2023. This kind of technological shock is by no means unique. It is a recurring pattern in the tech industry—seen with the advent of cloud computing, smartphones, social networks, e-commerce, mobile phones and the internet.
Agility in laying off also means agility in hiring. U.S. tech companies did not cut tens of thousands of engineering jobs to scale back investment—quite the opposite. These workforce reductions were aimed at reallocating resources to accelerate innovation where most promising. They immediately began hiring thousands of AI engineers and invested heavily in AI computing capacity. Meta provides a striking example: after reducing its workforce by 25% in just six months, as seen before, the company hired approximately 10,000 engineers and ramped up its investment in AI supercomputers from around $1 billion in 2022 to $20 billion in 2023, $37 billion in 2024, and a projected $65 billion in 2025. Microsoft and Google are committing even larger sums to AI infrastructure. … In practice, European Employment Protection Law (EPL) often makes such strategic shifts nearly impossible.
A broader discussion of this subject by Pieter Garicano was titled “Why Europe doesn’t have a Tesla” (Works in Progress, February 7, 2026). If you are fortunate enough to be hired as a worker for Volkswagen in Germany, you are essentially guaranteed a job for life–because the costs of laying off such workers are so very high. But the tradeoff is that no company is like to start a new auto manufacturing facility in Germany–not because the potential rewards are too low, but because the potential costs of failure and restructuring are so high. More broadly, if the costs of restructuring a large technology company will be very high, then spending the R&D money seek out new innovations and products will be less attractive as well.
So are we forced into a harsh choice between protecting workers from layoffs and economic dynamism? Perhaps the tradeoff need not be as severe as one might fear. In the Coatanlem and Coste study, they note that the costs of restructuring are at US levels, or even lower, in Denmark, Sweden, and Switzerland. The reason seems tied to a set of policies they call “flexicurity.” (Michael Svarer and Claus Thustrup Kreiner provide an overview of “Danish Flexicurity: Rights and Duties” in the Fall 2022 issue of the Journal of Economic Perspectives, where I work as Managing Editor).
The basic “flexicurity” idea is that the government provides a package of higher unemployment benefits combined with support for job search and job training–and if a displaced worker find an alternative job relatively soon, the higher unemployment benefits start to decline. To put it another way, a company that wishes to restructure bears a relatively modest share of the total costs of the adjustment, and the government steps in with policies and incentives to hasten the adjustment. These steps are also called “active labor market policies,” which differentiates them from “passive labor market policies” like just paying unemployment benefits for a time, and the US government has lagged far behind other high-income countries in such efforts.
24 Min
Europe’s cutting edge firms are falling far behind the American frontier because of restrictive labor laws.
being hired in a Volkswagen factory in Germany is a lifetime job
what if Volkswagen wants to shift to producing EV’s, and existing workers don’t have the skills?
