Learn Icelandic: Varkár maður myndi hafa labbað framhjá. - A careful person would have walked past.

It uses the conditional verb myndi (from munu, meaning "would") followed by the infinitive hafa (have), and finally the supine form of the main verb, labbað (walked). This myndi hafa + supine pattern is a standard way to express past hypothetical situations.

Could I say ...hefði labbað framhjá instead?

Yes, absolutely! Using the past subjunctive hefði (had / would have) + supine means the same thing. Varkár maður hefði labbað framhjá is actually slightly more common in everyday spoken Icelandic than spelling it out with myndi hafa.

Why doesn't varkár have an ending here, like varkári?

Because we are talking about "a careful person" (indefinite), so the adjective takes the strong declension. For a masculine, nominative, singular noun like maður, the strong form is simply varkár. If the sentence were about "the careful person", it would use the weak form: Varkári maðurinn.

What is the difference between using labbað and gengið here?

Both mean "walked" and are perfectly fine to use. Labba is a more casual, everyday word for walking or strolling. Ganga (which becomes gengið in the supine) is the standard, neutral verb for walking.