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# **2. Methodology**

Both qualitative and quantitative approaches have been used to analyze the impacts of different labor market institutions. Qualitative analysis is most common among “institutionalist” researchers who are interested in the complex interactions between institutions (especially unions) and the social and economic environment. However, regardless of perspective, quantitative analysis using various econometric techniques now dominates the field and, indeed, this review. Much of this research has been based on reduced form models that use aggregate cross-section data to explain the cross-country variation in various outcomes (such as unemployment) by differences in national labor market institutions. Increasingly, however, researchers are using longitudinal micro-data to estimate fixed effects models that isolate the variation in outcomes in a single jurisdiction over a period in which institutional change has occurred.

# **_2.1 Some methodological issues_**

Isolating the impacts of labor market institutions is inherently difficult. Without attempting to be exhaustive, this section briefly raises challenges that researchers face in terms of identification, measurement, and modelling and interpretation.

_Identification issues_ essentially result from the endogeneity of labor market institutions and the interactions between them. The endogeneity problem makes it difficult to attribute variations in outcomes to the institutions themselves, rather than other features of the societies in which they exist.<sup>4</sup> This is especially problematic when analysis is based on cross-country aggregate data and this is the major reason for scepticism about this approach. While single-country panels avoid this source of misidentification, they are not immune from endogeneity issues stemming from time-based sources—for example, certain institutional changes that are likely to be introduced at a certain point in the business cycle may be associated with outcomes that, in fact, could be due to the cyclical factors themselves.<sup>5</sup> Moreover, while single-country longitudinal studies may be useful for studying the impacts of some institutions that experience discrete changes (e.g., minimum wages), they are less suited for other institutions (e.g., unions) that evolve more gradually over time.

Interactions add to the challenge of identifying the effects of a specific law or policy. As Eichhorst, Feil, and Braun (2008) point out, it has become evident that two types of interactions are important to consider. One concerns interactions between different labor market institutions, with the impact of one being affected by another.<sup>6</sup> More generally, countries typically have “bundles” of complementary institutions (e.g., the lightly regulated Anglo-Saxon model, the Northern European flexicurity model, etc.) which make it difficult to isolate the effect of

> 4 In the first place, the institutions themselves are not exogenous variables but reflect the societies in which they exist.  This includes, for example, the country’s legal tradition (Botero _et al._ 2004); the strength of its family ties (Alesina _et al._ 2010); and civic attitudes (Algan and Cahuc 2006).

> 5 Model specifications can take into account this type of problem but require panel data series that are long enough to determine “normal” cyclical trends.

> 6 One example of this is the relationship between social insurance contributions and minimum wages.  How much the contributions affect employment will depend in part on who actually pays which in turn is affected by the minimum wage which limits the potential for shifting the costs to low-wage employees.