The article explores how labor market policies affect employment and worker flows in an economy with a large informal sector. The researchers found that introducing unemployment insurance doesn't reduce unemployment much but shifts formal jobs to the informal sector. Generous severance payments lower formal job wages and decrease transitions from unemployment to formal jobs. Shifting taxes from labor to consumption increases the formal sector, boosting productivity and welfare. Policy changes in a dual economy can have different effects compared to a single-sector economy due to workers' incentives to avoid taxes and maximize benefits by moving between sectors.