Labor Market Institutions and
of the Cross-Country Evidence
DEAN BAKER ANDREW GLYN DAVID R. HOWELL JOHN SCHMITT
The rigidities imposed by labor market institutions and policies are widely held to play a key role in the explanation of the European unemployment crisis of the 1980s and 1990s. This was the central message of the OECD's Jobs Study (1994), and a recent follow-up report on the implementation of the Jobs Study's recommendations confirms that this rigidity explanation remains the conventional wisdom: “Previous OECD work … and a growing body of academic research suggests a direct link between structural reform and labor market outcomes (see Box 2.3)” (OECD 1999: 52–53). A recent paper in the Swedish Economic Policy Review by three noted OECD researchers (Elsmeskov, Martin, and Scarpetta 1998) provides a good example of the broad consistency between OECD and academic research on the determinants of OECD unemployment. Comparing their results with Nickell and Layard (1998), a prominent academic paper, they conclude that “Both studies assign significant roles to unemployment benefits, collective bargaining structures, active labor market policies …and the tax wedge—even if the variables in question are defined somewhat differently between the two studies.” The International Monetary Fund has weighed in as well, making the case for labor market deregulation in two recent reports (IMF 1999, 2003). This consensus— which we will term the OECD-IMF orthodoxy—contends that labor market institutions and policies lie at the heart of the unemployment problem.
This chapter evaluates the empirical evidence for this orthodox view. Our approach is distinctive in that we begin from a skeptical stance and ask whether the available evidence, from both the literature and our own