Contrast (D) and (E) to see why (E) is preferable.
After the semicolon, (D) reads:
"the hiring and firing of workers is restricted there by various government regulations, its functioning being stifled."
--Main verb: "is restricted"
--Present participle: "being stifled"
We often see this type of construction when a main action yields a certain result (e.g. The volcano erupted (main action), spewing (result) lava over a large area."
This choice might seem OK: "being stifled" is the result of "is restricted," but "being" as a present participle is considered wordy and awkward by the GMAT. Mainly this is because clearer phrasing options exist (e.g. "because hiring and firing of workers is restricted, the functioning is stifled" OR "the functioning has been stifled by restrictions" and so on...). Beware of "being" in subordinate clauses on the GMAT.
Also, "its" does not have a clear antecedent in this choice, because we find it buried in the participle, making "the hiring and firing of workers" (could be considered singular), "the labor market", and even the implicit "government" possible antecedents.
After the semicolon, (E) reads:
"instead, its functioning has been stifled by various government regulations restricting the hiring and firing of workers."
--Main verb: "has been stifled"
--Adverbial modifier: "by various government regulations..." (i.e. HOW its functioning has been stifled)
That's much clearer than (D).
Also, "its" has a clear antecedent, "the labor market," because both pronoun and antecedent are subjects of their respective clauses (i.e. "the labor market has not been operating" and "its functioning has been stifled" are parallel. This parallelism is underscored by "instead.")