This essay stresses that the development of the debate took a dichotomous institutional perspective. One group consisted of researchers who supported the international financial institutions’ view that market forces give superior employment results. This group called for non-intervention in the labor market. The other group consisted of researchers sensitive to the UNICEF Report who supported the International Labor Organization’s view that given the existence of market failures in resource markets, including the labor market, government intervention is necessary to establish minimum conditions for employment.
This paper makes a conclusion that the Bank’s ‘distortion’ view claims that interventions result in employment failing to adjust to economic shocks. It argues that economic policies that protect employment in the face of economic decline result in more pain to enterprises, and worsens the recession, but says nothing about the pain to workers. Thus asserting that employment protection has efficiency costs is in a way selective and incomplete use economic theory. Nevertheless, Fallon and Lucas found the impact of labor market interventions to be perverse in India and Zimbabwe. They observed that strict employment protection significantly reduced the level of employment growth. The strength of unions is also viewed as a source of labor market inflexibility. Advocates of non-intervention therefore call for the weakening of unions to facilitate flexibility.