Kala Krishna and Cemile Yavas, Department of Economics, The Pennsylvania State University, use a Ricardian setup to show how such labor market distortions in transition and developing countries affect the level and distribution of income and hence the demand for indivisible consumer goods. In their model, effects in transition and developing economies differ, though the basic story is similar. They argue that in the absence of trade, wages are high due to the distortion, and as a result demand for indivisibles is high, which sustains these high wages. They also look at the effects of substitutability between goods on the gains from trade for a distorted economy. Their analysis suggests that labor market distortion prevalent in developing countries might lead to a fall in welfare, especially for a large country, when such economies open up to trade. The results are consistent with the experiences of some transition economies.