Test steps in Playwright are a feature that allows developers to annotate sections of their test code with descriptive labels, providing a high-level overview of the test's flow and aiding in debugging by pinpointing which step failed. This practice enhances readability, improves debugging, and serves as inline documentation, describing the purpose and actions of different parts of the test. By incorporating test steps into their tests, developers can transform their test cases from mere scripts into well-documented, easily understandable test suites.