One of the most notable phenomena during economic transition is the shrinkage of the public sector and expansion of the not working population, simultaneously with the expansion of both the formal and informal private sectors. We address the related labour dynamics of the pre and post 1996 crisis in Bulgaria with the use of a panel constructedfrom the 1995 and 1997 Bulgarian Integrated Household Surveys and a Markov chainmodel of job mobility. Our results support the hypothesis of substantial shrinkage of thepublic sector and movement out of the labour force. In addition, we find that during therapid downsizing of the public sector, the informal sector expanded more rapidly thanthe formal private sector. The links between the formal and informal sectors are complex and differ by gender.