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I donâ€™t think IE7 does highlight the input control â€“ at least not on the checkboxes iâ€™ve just tried with.
I think this method has some very valid benefits for accessibility, especially for partially- or poorly-sighted users. From what iâ€™ve read, screenreaders also often have problems visually locating labels with related controls, especially when the label doesnâ€™t wrap the control.
Itâ€™s also worth noting that when resizing text using the browser, checkboxes and radio buttons donâ€™t resize. Many people use this to make a site readable and an extra benefit is making links into bigger targets â€“ labels then become a more important way of activating a control.