Empirical work on the impacts of labour market institutions has produced mixed results. Much of this literature is based on reduced form regressions that are subject to severe econometric and measurement issues. This paper develops a framework to study the impact of labour market institutions in the context of a DSGE model. The advantage of using a DSGE model is that one can observe the general equilibrium outcomes of truly exogenous shifts in labour market policy. In addition, this class of models are flexible, can be easily estimated and one can undertake policy simulations and counterfactual exercises. After inspecting the short and long run response of key variables to several labour market reforms, an application to the Euro area reveals that between 1970 and 2003, changes in labour market institutions had only a limited impact on the volatility of output, inflation and unemployment. These results stand in contrast to theories attributing to excessive regulation for the rise and persistence of European unemployment. In addition, they suggest that labour market frictions are at most of marginal interest for central banks.