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

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continental European countries; and six mainly northern European low unemployment
countries. These roughly correspond to the traditional groupings used in the “varieties of
capitalism” literature – liberal/market-oriented economies; conservative/coordinated
economies; and social-democratic countries with strong, universalistic welfare states.
While both of the European groups show much greater levels of social protection and
regulation (rows 4-9) and much higher tax revenue shares (row 10), only the
conservative/corporatist economies show worse employment performance than the liberal
economies. Indeed, on both unemployment and employment rates, the northern European
welfare states show, on average, superior labor market performance to the liberal ones
(rows 1-3), and they do so with much lower wage inequality (row 11). As Nickell (1997;
2003) has pointed out, many Europeans live in regions with lower unemployment rates
than the U.S. and most of the unemployed of Europe live in four large countries (France,
Spain, Italy and Germany).
2. Correlation Evidence
2.1 Implicit Correlations
Perhaps because the deleterious effects of social regulation on labor market
performance is so widely accepted, establishing the link has often been done simply by
establishing that a country’s score on a particular institutional measure is relatively high.
For example, Heckman (2003, p. 373) suggests that part of the German employment
performance problem is due to “substantial” unemployment benefit replacement rates,
because “Germans, like all people, respond to these incentives (not to work).” The
OECD’s Economic Survey of France (OECD 2005x) establishes that employment
protection is relatively strict in France and calls for a series of reforms, but no evidence
or references are offered to establish that EPL strictness helps explain French
unemployment, or that the recommended reforms would reduce it. Similarly, the OECD’s
Economic Survey of the Netherlands (OECD 2005x, p. 25) recommends “increasing the
responsiveness of employment to economic conditions by easing strict EPL or regular
contracts, (and) making real wages even more responsive to unemployment by phasing
down unemployment benefit replacement rates as unemployment spells lengthen”
without reference to any evidence on the links between either EPL strictness and