This is the third part in my series of articles against labor unions. See Part I clarifying concepts and showing how unions practically always require government coercion, meaning that they cannot be justified in a classical liberal framework. Part II relies on basic economic principles to explain why unions are a terrible way to help workers. After publishing those two pieces, I got distracted by other things and it’s now been 17 months. Sorry for keeping everyone waiting.

The impetus to finally write this article came from seeing the excellent essay “Why Europe Doesn’t Have a Tesla,” by Peter Garicano in Works in Progress (see also this podcast). In fact, it’s so good that I think he’s done much of the work for me, so I’m going to post large excerpts and share some additional thoughts.

One reason I hesitated to finish the third part of the series was that I wanted to write that labor laws are a large part of the explanation as to why the US is so much wealthier than Europe. This has always been a hunch, but I didn’t know if I could sufficiently prove it. Garicano’s article has helped convince me that I am correct, and if anything I underestimated the degree to which labor laws hold Europe back.

Before I start, I want to note two things. First, I now realize that in the earlier articles of this series I focused too narrowly on labor unions. They’re very bad, but the issue is actually broader and is really about having a free market in labor. You could have a country with no unions but that nonetheless enacts worker protections that are terrible for individual liberty and growth. Labor unions are a mechanism through which countries get bad policy. But governments often do many of the same things through legislation. It’s important to be anti-labor union, but you should just as strongly be against worker protections that mimic what unions do.

frederic-bastiat_mini — The Frenchman who understood why labor protections were bad.

Second, I arrive at the view that the free market in labor is key to the US-Europe wealth gap partly through a process of elimination. 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.

Having read Garicano’s article helped me realize how massive the gap in labor freedom is between the US and Europe. 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.

Garicano begins:

In recent decades, Europe has fallen behind the United States. In 2000, incomes in the original six members of the European Union were just 10 percent behind Americans. Today, they are 20 percent lower. One factor behind this has been the lack of innovation in European business. To a striking extent, Europe lacks tech giants like Google, Meta and Amazon. But even in industries in which it has traditionally excelled, like carmaking, Europe has failed to keep up. Tesla is now worth more than the next nine largest carmakers in the world put together. Six American cities are now served by robotaxis made by Waymo. Understanding why Europe doesn’t have Google is important. Understanding why it doesn’t have a Tesla is existential.
There are many partial explanations: high energy prices, expensive housing, excessive proceduralism, high taxes, extractive interest groups, and politicians with a penchant for degrowth. But all of these problems are true of California as well [emphasis added], which is n...

Labor Freedom Is the Best Explanation for the US-Europe Income Gap