We extend the benchmark model of Aghion and Blanchard (1994) assuming two segments of the emerging private sector that differ in workers’ productivity. We look at the paths of employment, wages, taxes, labor costs and profits during and after the transition, up until the shock is fully...

Mounting evidence suggests that excessive job protection reduces employment and labor market flows, hinders technological innovations, pushes workers into the informal sector, and hurts vulnerable groups by depriving them of job opportunities. Flexible labor markets stimulate job creation,...