This article presents error correction estimates of a simple interdependent model of the labour market using monthly data over 1990-1994 for the industrial sector in Poland and Hungary. Our aim is to investigate three issues. First, is there a stable labour market equilibrium or is there evidence for hysteresis? Second, has the intensity of employment adjustment increased with progress in institutional reforms? Third, what governs the evolution of real wages and to what extent is there evidence for strong insider power? The results reveal striking differences between Poland and Hungary. The intensity of adjustment, however, is high in both countries and fails to respond to the initiation of institutional reforms.