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This paper explores the relationship between labor market and employment on one hand and macroeconomic imbalance and its adjustment on the other. It argues that distortions and rigidities in the labor market can aggravate macroeconomic imbalance and create impediments in the way of their adjustment. It also argues that the initial system of economic incentives and institutions and the composition of adjustment policies determine what kind of impact adjustment has on employment. A comparison of the experience of a group of South Asian countries with that of a group of East and Southeast Asian countries provides useful insights into the kind of labor market policies and institutions that are most conducive to the avoidance of macroeconomic imbalance and to the rapid adjustment of the imbalances that occur. This comparison also helps identify guidelines for the design of employment-friendly adjustment.