Institutions and Economic Performance: Evidence from the Labour Market

We analyse the institutional determinants of economic performance, taking European labour-market institutions as a case in point. European economic growth after the Second World War was based on Fordist technologies, a setting to which the continent's institutions of solidaristic wage bargaining were ideally suited. They eased distributive conflicts and delivered wage moderation, which in turn supported high investment. The wage compression that was a corollary of their operation was of little consequence so long as the dominant technologies were such that firms could rely on a relatively homogeneous labour force. But as Fordism gave way to diversified quality production, which relied more on highly skilled workers, the centralization of bargaining and the compression of wages became impediments rather than aids to growth. Assuming that growth will rely even more in the future on rapidly changing, science-based, skilled-labour-intensive technologies, countries with centralized labour-market institutions will have to move still further in the direction of decentralization. Whether Europe in particular can accommodate these demands will help to determine whether it is able to re-establish a full employment economy in the twenty-first century. Copyright 1999 by Oxford University Press.