This paper examines the failure of the labour market in Macedonia, a country with the highest unemployment rate in Europe. We describe the labour market institutions and policies in Macedonia during the transition. We also examine the job creation and job destruction using firm-level data and we estimate short- and long-run elasticities of labour demand. The results imply that the relatively speedy privatization of state enterprises in Macedonia has failed to spur a recovery of labour demand. We can also conclude that firms in Macedonia began adjusting their employment to the changing conditions later than their Central European counterparts.