Abstract
The current debate on sluggish growth in Europe largely ignores labour market dynamics. Based on a comparison of productivity trends and IT investment in the US and Europe, we investigate how rigid labour market institutions can hamper the economy’s ability to adapt. Especially in times of technological upheaval, labour market flexibility is an important driver of growth that enables disruptive innovation. We argue for more research on the growth effects of labour market institutions and for policies that enable employees to be more mobile and adaptable.