The persistence of high unemployment in a number of industrial countries―notably in continental Europe―is arguably one of the most striking economic policy failures of the last two decades. A wide range of analysts and international organizations―including the European Commission, the Organization for Economic Cooperation and Development (OECD), and the International Monetary Fund (IMF)―have argued that the causes of high unemployment can be found in labor market institutions. Accordingly, countries with high unemployment have been repeatedly urged to undertake comprehensive structural reforms to reduce "labor market rigidities" such as generous unemployment insurance schemes; high employment protection, such as high firing costs; high minimum wages; noncompetitive wage-setting mechanisms; and severe tax distortions. While there are solid theoretical arguments underpinning the call for such reforms, the empirical evidence is somewhat less developed and, in some cases, unsupportive (see, for instance, Cohen, Lefranc, and Saint-Paul, 1997). This is partly because until recently the data on labor market institutions was not well enough developed to allow a full analysis of the multiple and complex linkages between labor institutions and unemployment.
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