Mother-of-pearl, also known as nacre, is the iridescent material which forms the inner layer of seashells from gastropods and bivalves. It is mostly made of microscopic ceramic tablets densely packed and bonded together by a thin layer of biopolymer. The hierarchical microstructure of this biological material is the result of millions of years of evolution, and it is so well organized that its strength and toughness are far superior to the ceramic it is made of. In this work the structure of nacre is described over several length scales. The tablets were found to have wavy surfaces, which were observed and quantified using various experimental techniques. Tensile and shear tests performed on small samples revealed that nacre can withstand relatively large inelastic strains and exhibits strain hardening. In this article we argue that the inelastic mechanism responsible for this behavior is sliding of the tablets on one another accompanied by transverse expansion in the direction perpendicular to the tablet planes. Three dimensional representative volume elements, based on the identified nacre microstructure and incorporating cohesive elements with a constitutive response consistent with the interface material and nanoscale features were numerically analyzed. The simulations revealed that even in the absence of nanoscale hardening mechanism at the interfaces, the microscale waviness of the tablets could generate strain hardening, thereby spreading the inelastic deformation and suppressing damage localization leading to material instability. The formation of large regions of inelastic deformations around cracks and defects in nacre are believed to be an important contribution to its toughness. In addition, it was shown that the tablet junctions (vertical junctions between tablets) strengthen the microstructure but do not contribute to the overall material hardening. Statistical variations within the microstructure were found to be beneficial to hardening and to the overall mechanical stability of nacre. These results provide new insights into the microstructural features that make nacre tough and damage tolerant. Based on these findings, some design guidelines for composites mimicking nacre are proposed.