This paper investigates how human capital and factor market imperfections affect households' decisions on their labor use and reallocation in transition countries. A model is first developed, which explicitly accounts for heterogeneity in the supply of labor, and how this affects the allocation of labor is analyzed. Furthermore, the model studies how imperfections in the capital and labor markets affect this reallocation process. In the second part of the paper a unique dataset of Hungarian rural households based on a countrywide representative survey is used to empirically assess the impact of human capital and factor market imperfections on labor allocation.
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