Introduction

Debates in the realm of economic policy often reflect diverse perspectives on the way the labour market functions. Thus, in conventional macroeconomic policy management, arguments about the existence of a trade-off between inflation and unemployment reflect competing notions of the role that the labour market plays in the economic adjustment process. If the demand for, and the supply of labour services, can adjust swiftly to external disruptions and disturbances, then there will be an innate tendency for the economy to gravitate to its ‘natural’, fullemployment rate. Deviations from this rate are a reflection either of ‘voluntary’ unemployment or institutional and policy-induced rigidities in the labour market. This in turn enables one to argue that policy makers, both in poor and rich economies, should focus primarily on engendering price stability by controlling inflation, while allowing market-driven ‘supply-side factors’ to determine real wages and employment. This can be described as the ‘new classical’ view of macroeconomic policy. The alternative view maintains that, in the real world, there are indeed institutional rigidities, as well as social norms and conventions, which make the labour market different from the market for goods. In such an institutional context, a short-run trade-off between inflation and unemployment is the norm rather than the exception. A preoccupation with controlling inflation is thus counterproductive. This can be described as the ‘new Keynesian’ view of macroeconomic policy. In the domain of development policy, where one is concerned primarily with long-run growth and the goal of sustainable reductions in poverty, views about how the labour market is governed matter a great deal. Thus, those who subscribe to the virtues of a flexible and competitive labour market regard it as a key determinant of a business-friendly investment climate that in turn engenders sustainable growth and reduces poverty. This model of a fully competitive labour market also underpins ‘new classical’ macroeconomics. The proponents of some form of labour market regulations argue that they are necessary to respect labour rights and protect workers against labour risks, and that they could indeed promote productivity and economic growth in the long run. The latter

seek a balance between the imperatives of maintaining a business-friendly investment climate and the protection of workers. The aim then becomes one of designing a regulatory framework that can do both.