Labor market institutions and economic performance

Barely a day goes by without some expert telling us how the continental European economies are about to disintegrate unless their labor markets become more flexible. Basically, we are told, Europe has the wrong sort of labor market institutions for the modern global economy. These outdated institutions both raise unemployment and lower growth rates. The truth of propositions such as these depends on which labor market institutions really are bad for unemployment and growth, and which are not. Our purpose in this chapter is to set out what we know about this question. Our conclusions indicate that the labor market institutions on which policy should be focussed are unions and social security systems. Encouraging product market competition is a key policy to eliminate the negative effects of unions. For social security the key policies are benefit reform linked to active labor market policies to move people from welfare to work. By comparison, time spent worrying about strict labor market regulations, employment protection and minimum wages is probably time largely wasted.