Economic development is typically accompanied by migration from rural to urban employment. This migration is often associated with significant urban underemployment. Both factors are important in the development process. The authors consider a neoclassical growth model with rural-urban migration and urban underemployment, which arises from an adverse selection problem in labor markets. They demonstrate that rural-urban migration and underemployment can be a source of development traps and can give rise to a large set of periodic equilibria displaying undamped oscillation. Many such equilibria display long periods of uninterrupted growth, punctuated by brief but severe recessions. Copyright 1997 by the University of Chicago.