Labor laws are a large part of the explanation as to why the US is so much wealthier than Europe:
Americans do much better than Europeans, but the US is not clearly economically freer in most areas. For example, Heritage’s 2025 index of economic freedom puts it behind eleven European countries. The US is ranked 27th in the world in overall economic freedom, but 3rd in labor freedom. Given the degree to which the US has surpassed other major nations, perhaps indexes like this are underweighting the importance of this one particular category. America is far from a capitalist paradise; particularly in housing and allowing people to build, we do a pretty poor job.
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Imagine if the entire force of government policy was put toward enforcing a status quo bias in other contexts: government created every possible financial incentive to keep people in the same homes; made sure they continually drive the same cars or buy vehicles from the same companies; or put up an endless number of barriers in the way of them switching grocery stores or banks. Everyone would realize that such policies represent the height of economic illiteracy and would be bound to have all kinds of unintended consequences. Yet we treat labor as different, even though the underlying economic principles are exactly the same.
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In Germany, they not only tell you if you can fire people, but you can’t even decide who to keep! Paying employees indefinitely to leave is the optimistic scenario when they are no longer needed. The worse outcome is that you’re forced to hold on to them indefinitely.
Basically, what this system amounts to is a welfare state, while placing the burden on those who create jobs in the first place. To make another analogy, imagine we wanted to provide healthcare for the poor. But instead of paying for it through general taxation, we said anyone who provides any amount of charity to someone living in poverty must be the one to pick up the tab for their health insurance. How would such a system make sense? And this isn’t simply a matter of finding ways to provide welfare, but something much more extreme, involving locking employers in relationships they can’t get out of. You’re also misallocating labor, since having workers in places where they’re not needed prevents them from making a contribution elsewhere.
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European workers don’t simply go to waste. Rather, the entire economy becomes centered around making decisions that are financially safe rather than those that can lead to major payoffs. The unemployment rate doesn’t look so bad, but you still get society-wide stagnation.