Comments on Are Protective Labor Market Institutions at the Root of Unemployment? A Critical Review of the Evidence by David Howell, Dean Baker, Andrew Glyn, and John Schmitt
Howell, Baker, Glyn, and Schmitt (HBGS) challenge the consensus view (the “orthodox” view, as they call it) on the causes of European unemployment trends. Numerous papers in this literature examine essentially the same data base. The authors construct alternative measures of incentives or disincentives created by institutions—usually some index or indices of regulatory activity. HBGS and the unpublished papers they cite perform a valuable professional service by carefully studying the robustness of the evidence on the role of protective labor market institutions (PLMI) in creating European unemployment. HBGS are convincing in showing the fragility of the evidence on the role of labor market institutions in explaining the pattern of European unemployment, using standard econometric methodology. Their use of rigorous econometric methods contrasts with the casual empiricism used in the real business cycle (RBC) literature that picks parameters out of a hat and does not subject models to a rigorous test.