The folder thumbnails, the ones where thumbnails of the images inside the folder are shown on the folder icon, don't work for jpeg files. They do however work for png and gif files.

I've tried this on two different machines and on a new account and it behaves the same. I think the problem started with kde 4.7.

Is there something I have to install to get it to work?

You need to enable JPEG images independently of the default Previewing of image files it seems. Open Dolphin > (Wrench) > Configure Dolphin > General > Previews. Check "JPEG".

I already have Previews/JPEG set but while it thumbnails JPEG files just fine it doesn't do the folders

Does anyone else have this problem?

I do see the same thing on Fedora 15 with 4.7.0. I didn't notice before because I usually have previews turned off.