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This paper examines both the determinants and the effects of changes in the rigidity of labor market legislation across countries over time. Recent research identifies the origin of the legal system as being a major determinant of the cross-country variation in the rigidity of employment protection legislation. However, the supporting evidence is largely confined to levels of regulation and is almost exclusively based on international cross-section data for the post-1995 period. This paper introduces a new index capturing the rigidity of employment protection legislation (LAMRIG) for an unbalanced panel of more than 140 countries over time starting in 1960. Although the importance of legal origins in explaining the level of rigidity of labor regulations across countries is replicated using LAMRIG, their explanatory power is much weakened for changes over time (1960-2004.) More important as determinants of such changes are the level of development and other reforms such as trade liberalization. With respect to the effects of changes in the rigidity of labor regulations on growth and inequality, which have been very controversial in the literature, results with LAMRIG support Freeman's conjecture that changes in rigidity do not systematically affect economic growth but do lower income inequality.

Does fractionalization change over (short periods of) time? If so, are there any substantial implications for economic performance? To answer such questions, we construct a new panel data set with measures of ethnic, linguistic, and religious fractionalization for 26 former communist countries covering the period from 1989 to 2002. Our fractionalization measures show that transition economies became more ethnically homogeneous over such a short period of time, although the same did not happen for linguistic and religious diversity. In line with the most recent literature, there seems to be no effect of (exogenous) diversity on macroeconomic performance (that is, on per capita GDP growth). However, we find that dynamic (endogenous) ethnic diversity is negatively related to growth (although this is still not the case for linguistic and religious diversity). These findings are robust to different specifications, polarization measures, and instrument sets as well as to a composite index of ethnic‐linguistic‐religious fractionalization.

What is the relationship between economic growth and its volatility? Does political instability affect growth directly or indirectly, through volatility? This paper tries to answer such questions using a power-ARCH framework with annual time series data for Argentina from 1896 to 2000. We show that while assassinations and strikes (what we call informal political instability) have a direct negative effect on economic growth, formal political instability (constitutional and legislative changes) has an indirect (through volatility) negative impact. We also find preliminary support for the idea that while the effects of formal instability are stronger in the long-run, those of informal instability are stronger in the short-run.

Although in theory the long‐run effect of uncertainty on investment is ambiguous, available econometric evidence widely supports a negative association between aggregate investment and political instability. A shortcoming of this body of evidence is that it has failed to investigate the existence and direction of causality between these two variables. This paper fills this gap by testing for such causal and negative long‐run relationship between political instability and investment. We find there is a causal relation going from instability to investment, but it is positive and particularly strong in low‐income countries. This finding is robust to various sensitivity checks.