Europe’s Labor Rules Are Holding It Back

Last week, the U.S. Department of Labor proposed a new rule that would increase the flexibility of independent contractors and reduce employment costs for app-based service companies, such as Uber and DoorDash. Specifically, the rule would rescind current classification standards and replace them with a streamlined “economic reality” test to more easily determine whether a worker can be classified as an independent contractor. 

Although the proposed rule could benefit both employers and America’s nearly 12 million gig workers, what makes it especially notable is the widening transatlantic divergence on labor laws. 

In December 2024, the European Union adopted rules to “reclassify many gig workers as employees,” explains the French-based Institute for Research in Economic and Fiscal Issues. As employees, these workers are entitled to benefits paid for by employers, like sick leave and social security, which could have several unintended economic consequences. E.U. member states have until December 2026 to implement these regulations into national laws. 

The difference between American and European labor laws goes beyond gig work. In the U.S., employers can terminate workers at any time and for almost any reason, while employees, too, can leave at any time, for any reason. 

Laying someone off in Europe is not so simple. German law, for example, requires companies to consider a variety of factors, including age, family obligations, and years of service, before deciding on layoffs. Employees who take on a caregiving role in their families are fully protected from dismissal for two years from the day they begin working. As a result, 10 times as many American workers are fired each month as German workers are on a per capita basis. 

As Pieter Garicano argues in Works in Progress, rules like these incentivize companies in Europe to shift away from industries that are susceptible to layoffs, like AI and tech. Consequently, European economies are less conducive to innovation and experimentation. They are also less friendly to new and inexperienced workers.

In the United Kingdom, where economic growth forecasts are being downgraded and unemployment is set to peak in 2026, the government is actively making things worse. The Employment Rights Bill, which passed through Parliament at the end of 2025, gave all workers the right to file a lawsuit for unfair dismissal after six months of employment. This legislation, which may have been well-intentioned, contributes to the general reluctance employers have to hire an inexperienced young employee who is more likely to be fired. Indeed, the U.K. now has the highest youth unemployment rate in Europe, which is set to jump to 5.3 percent in 2026. Meanwhile, 25 percent of working-age people are out of work, and in the last quarter of 2025, almost 13 percent of 16- to 24-year-olds were not in school, vocational training, or a job, according to the Office for National Statistics. That is almost a million young people not afforded the dignity, responsibility, or purpose work gives.

Innovation requires risk and experimentation. America recognizes this, and it has yielded immense economic benefits. Europe, on the other hand, has not grasped this concept, which is one of the many reasons why the average European has less than their American counterpart.