This paper examines the labour market in Macedonia, a country with the highest unemployment rate in Europe. I describe labour market institutions and policies during the transition. I also examine job creation and job destruction using firm-level data and I estimate short-term and long-term elasticities of the labour demand. The analysis shows that there are regulatory barriers to the labour market flexibility. I can also conclude that the privatization of socially owned enterprises has failed to promote job creation. Nevertheless, labour market problems seem to stem from factors other than substantial sluggishness of firms in adjusting employment to variations in wages.