Labor Market and Economic Reform

Many developing nations have embarked on the path of intensive economic reforms. Economic reforms have a major impact on the various component markets prevailing in the economy such as the Labor Market, Product Market, Money Market. As such the success of the economic reforms also depends on the dynamics of these markets.
Some of the important aspects of economic reforms that are affected by market dynamics of these markets are –
Contraction of government spending
Liberalization of the economy
Privatization of Public Sector Units (PSUs)
Restructuring of the tax system
Relaxation of trade barriers.

The labor market dynamics are strategic to economic reforms.

The degree of rigidity of the labor market has a significant impact on the success of economic reforms. For economic reforms to be effective, labor market components need to be allowed to operate freely without regulatory interventions. Labor costs should be allowed to vary freely with changes in labor demand.

Rigid labor markets are not conductive to economic reforms. In the era of economic reforms wages in certain sectors may need to fall or rise, depending on the prevailing market situations. This is needed in order to retain competitiveness in the specific sector. One of the major components of economic reforms undertaken by developing economies is the liberalization of trade. When trade liberalization takes place, some sectors in the economy will have to face import competition. In such a case wages in those sectors need to be cut in order to maintain competitiveness. If cutting of wages is forbidden or restricted by regulations then the sectors will have to reduce the number of workers or loose competitiveness. With a flexible labor market, the process of restructuring a sector to retain competitiveness in the wake of trade liberalizations is much smoother.

Another major factor in the case of economic reforms and labor markets is the resistance to reforms from the labor force. Economic reforms lead to market competition and privatization of state owned units. This is often resisted by workers in the public sectors. Large groups of organized protesting work force can put up massive resistance. This hampers the process of economic reforms.

In order to make the labor markets compatible to economic reforms certain initiatives are required. Deregulation of the labor market is important aspect. Economic reforms in developing countries should include the process of labor market deregulation. Regulations pertaining to minimum wages should also be relaxed. In labor abundant economies, costly labor would not be conductive to economic reforms.

Other initiatives taken by governments to address the issue of economic reforms and labor markets include –
Unemployment subsidies and other benefits.
Special packages for job separation.
Early Retirement schemes like VRS, etc.


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Last Updated on : 26th June 2013

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