This paper documents the large cross-country differences in labor institutions that make thema candidate explanatory factor for the divergent economic performance of countries andreviews what economists have learned about the effects of these institutions on economicoutcomes. It identifies three ways in which institutions affect economic performance: byaltering incentives, by facilitating efficient bargaining, and by increasing information,communication, and trust. The evidence shows that labor institutions reduce the dispersion ofearnings and income inequality, which alters incentives, but finds equivocal effects on otheraggregate outcomes, such as employment and unemployment. Given weaknesses in the crosscountrydata on which most studies focus, the paper argues for increased use of micro-data,simulations, and experiments to illuminate how labor institutions operate and affectoutcomes.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0844.
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