Research on informal employment in transition countries has been very limited because of a lack of appropriate data. A new rich panel data set from Ukraine, the Ukrainian Longitudinal Monitoring Survey (ULMS), enables us to provide some empirical evidence on informal employment in Ukraine and the validity of the three schools of thought in the literature on the role of informality in the development process. Apart from providing additional evidence with richer data than usually available in developing countries, the paper investigates to what extent the informal sector plays a role in labor market adjustment in a transition economy. The evidence points to some labor market segmentation since the majority of informal salaried employees are involuntarily employed and workers seem to queue for formal salaried jobs. We also show that the dependent informal sector is segmented into a voluntary upper tier and an involuntary lower part where the majority of informal jobs are located. Our contention that informal self-employment is voluntary is confirmed by the substantial earnings premia associated with movements into this state.