Are Labor Market Institutions Really at the Root of Unemployment ...

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reflects the effects of two countries which, though showing increasing unemployment,
have both remained at very low levels (Switzerland and Norway), while another (Italy)
adopted a benefits system for the first in the early 1990s (which explains the big change
in Italy’s gross replacement rate). Many countries show small changes in the benefits
replacement rate (both up and down) and large changes in unemployment (from -7
percentage points for Ireland to +3 points for Japan). In Section 4 we will return to the
question of how much weight ought to be assigned to these changes in the gross
replacement rate.
3. Macroeconometric Evidence
3.1 The Consensus
As employment performance across much of Europe worsened, economists turned
their attention to the links between institutions, rigidities, and unemployment (Blanchard
and Summers, 1986; Lindbeck and Snower, 1988). A statistical demonstration of the
orthodox rigidity account required appropriate measures of key labor market institutions,
the development of which was pioneered by Stephen Nickell, Richard Layard and various
colleagues. With these new measures, the results of cross-sectional regression tests were
published in a series of papers and books in the early- and mid-1990s (Layard, Nickell,
and Jackman, 1991 and 1994; Nickell and Bell, 1994; Layard and Nickell, 1996). At the
same time, research within the OECD for the Jobs Study, generated new and improved
measures of labor market institutions, which helped produce more sophisticated analyses
by OECD researchers (Scarpetta, 1996; Elmeskov et al., 1998).
This early- to mid-1990s research spawned a rapidly growing literature aimed at
explaining cross-country differences in unemployment or the evolution of these
differences over time. The most influential of these share the same broad conclusion –
that in one way or another, the regression analysis lends support to the orthodox
theoretical expectation that labor market institutions have played a key role in these
cross-country unemployment differences, with clear implications for policy. For
example:
• “Thus, with six institutional variables plus the change in inflation, we can explain
over 90 per cent of the differences in unemployment between countries” (Layard,
Nickell and Jackman, 1994, p. 82).