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In many developing countries there are abundant supplies of "Surplus labor" from rural areas. The authors examine in a simple, dynamic framework how the existence of this large supply of rural unskilled labor affects trade, urbanization, capital accumulation, factor returns, as well as sectoral and aggregate output and social welfare. They find that since the migration equilibrium pins down the real unskilled wage, many comparative-static results with respect to changes in trade-related policies in the surplus-labor economy are different from the conventional model without surplus labor.
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