Lax employment laws may boost tech but they also create moral hazard

Making it easier to can workers may help moonshot companies grow but it would not be just, says Jason Walsh

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A flurry of recent articles attempting to explain why Europe lags regions such as the US and China when it comes to information technology appears to have hit on the idea that workers in the EU just have too many rights.

As it happens, Europe’s sluggish tech sector is a subject close to my heart, and one that I wrote about here, both in 2022 and twice in 2023, so I am happy to have some company on this.

Writing last week in the Financial Times, Yann Coatanlem made a suggestion: make it easier to get rid of staff so that businesses can take chances and, if they fail, rapidly move on to other things. 

The thesis is that, as investing in technology is risky due to its propensity to fail, technology businesses, and ultimately investors, should be cushioned. 

“Restructuring matters more in tech than in any other sector. Why? Simply because frontier-tech investments are riskier. It is not uncommon to see failure rates of 80%,” Coatanlem wrote.

The Economist’s EU bureau chief chimed in too, posting on X (formerly Twitter) to say “restructurings are cheap and fast. In Europe, severance can take years and costs millions”.

The thing is, tech investments being prone to failure sounds to me very much like a problem that is proper to investors, not workers. 

After all, while investors do shoulder risk they also reap enormous rewards when they succeed. A good year in the market sees share prices grow by between eight and 12 percent. In the past year, shares in Broadcom have grown by 121.07%, Microsoft has seen a rise of 61.75%, Apple by 16.79%, AMD 149.68%, and Nvidia by a, frankly comical, 249.32%. 

Even Intel, often referred to in 2023 as “the beleaguered Intel”, has seen its share go up by 68.60% in the last year, albeit after dropping 22% in 2022.

Win some, lose none

With these hyper-profits comes, and indeed must come, the chance of investors losing money. Selecting and purchasing shares, or a private stake, in a single company on the basis that it will perform well in the future may be an informed bet made by someone who has analysed both the market and the business, but, nonetheless, a bet is what it is.

Demanding that workers get the heave-ho in order to make ultra-risky investments less risky is truly perverse and, indeed, would create a perverse incentive that would result in more money being piled into more moonshots. Anyone who lived through the 2008 financial crisis that wrought devastation on Ireland will remember discussions of moral hazard, which is to say that bailouts promote excessive risk-taking. Similarly, alibet not on quite the same scale, creating exemptions to hitherto universal rules in order to cushion investments would be a licence to take risks, some of them doubtlessly excessive.

In fairness to Coatanlem, he isn’t suggesting wholesale deregulation of employment law. Instead, he puts it thusly: “A solution that does not threaten the European social model, and which could be highly effective, would be to reform employment protection laws for salaries above a high threshold”.

Nevertheless, it seems to me that the European social model would be threatened by this. Rights, once chipped away at, are likely to see more chisels in the future. While I am fairly unconcerned about the fate of extremely highly-paid tech workers who earn a salary five times my annual income, a principle is a principle.

In addition, we can see with the expansion of the gig economy and other forms of fake self-employment that the bottom rung of the ladder is already the loosest of all.

There is no question that Europe lags in technology, and there is no doubt that both executives and politicians should think about how to change this. Bulk-mailing P45s, though, is not the answer.

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