Labour market changes and the impact on startups

The UK and Europe’s labour markets are confronting a storm of structural pressures that threaten to eat away at their competitiveness in a rapidly evolving global economy. Fundamental among these is demographic decline: birth rates have fallen sharply across the continent, while life expectancy continues to rise. In Italy and Portugal, for instance, more than a quarter of the population is now over 65, while this figure stands at 20% in the UK – a shift that is shrinking the workforce and increasing the burden on public finances.

At the same time, Europe’s digital transition remains sluggish. While the US and parts of Asia are accelerating the deployment of AI, automation and digital infrastructure, many European economies – particularly in the southern eurozone – are lagging. This inertia risks entrenching inefficiencies and widening productivity disparities. Despite low unemployment in several member states, output per hour worked remains subdued, held back by rigid labour regulations, underinvestment in innovation, and managerial conservatism.

These dynamics are particularly punishing for Europe’s startup ecosystem. Structural barriers – including a fragmented regulatory landscape and limited access to venture capital – continue to constrain growth. Entrepreneurs frequently encounter high compliance costs and administrative burdens that sap resources better spent on product development and hiring. Unlike the US, where startups benefit from deep capital markets and a culture of risk, Europe’s innovators often struggle to scale beyond their home markets.

Target policy that facilitates the future of work

In response, the European Union has advanced a suite of policy tools to shape the future of work. The Artificial Intelligence Act, finalised in 2024, seeks to regulate algorithmic systems and prevent discrimination. But early feedback suggests the rules could disproportionately burden smaller companies, discouraging AI adoption in precisely the sectors where productivity gains are most needed. The tension between innovation and regulation is increasingly acute for Europe’s startups, many of which operate without the legal or compliance teams of their corporate counterparts. Similarly in the UK the Employment Rights Bill, introduced to Parliament in 2024, represents burdens for SMEs rather than benefits and facilitation.

In parallel, the Platform Work Directive, adopted in 2024, aims to protect Europe’s 43 million freelance and gig workers by clarifying employment status. Yet, there is growing concern that a rigid interpretation of the rules could force millions of independent workers into employment contracts that strip them of the flexibility and autonomy they value. This is no marginal issue: over 13,000 freelancers have signed a petition urging policymakers to preserve their right to work independently. For startups – many of which rely on flexible talent – the threat of reduced labour agility is a significant concern.

The UK and Europe’s path forward must involve a more nuanced understanding of the modern labour market – one that champions flexibility, empowers entrepreneurship, and enables technology adoption without overburdening startups and SMEs. Without such a shift, the continent risks missing out on the very innovation that could rejuvenate its ageing, low-productivity economy.

Work, reconstructed

It is against this background that I highlight the changing realities that make up the future of work in my new book Work, Reconstructed. This traces the evolution of work from something dirty, dour and dangerous at the time of the Industrial Revolution to the freedom workers are choosing today. It also looks at the role of technology in this transformation as well as other drivers for change.

The book also highlights freelancing and entrepreneurship today in terms of how to get started and what to think about from a practical perspective, as well as the requirements to succeed with this workstyle. From a corporate perspective the book treats why businesses need to embrace open talent, their main considerations to profit from this sea change, how AI has transformed leadership and the rise of HR outsourcing. The final section of the book analyses the requirements of politicians and policymakers vis-à-vis the world of work, as well as the new government policies and services that are needed for it to thrive.

While the right framework is needed to facilitate the future of work for startups and SMEs, rather than stifle it, decision makers should maintain their hope, optimism and belief in technology as well as the changing labour market. Harnessing these developments will benefit individuals, companies and the broader economy as a whole across Europe. The caterpillar will not become a butterfly without a helping hand.

Glen Hodgson is the CEO of the think-tank Free Trade Europa and author of the book WORK, RECONSTRUCTED.