You still have a point about the usability of labels outside the form field, especially given the caveat in the article that "this plugin still has problems when the browser tries to pre-fill the fields".

But it's still a useful technique because it makes the labels a lot easier to read because it's possible to left-align both the labels and the input fields. Just to give you a sense on how much thought needs to go into the graphic design of labels and form fields, here's a breakdown of the pros and cons behind labels arranged vertically, left-justified and right-justified:

http://www.lukew.com/resources/articles/web_forms.html

There's so much to learn about form design that the guy milked into an entire book.