The Decline of the U.S. Rust Belt: A Macroeconomic Analysis

Abstract

No region of the United States fared worse over the postwar period than the "Rust Belt," the heavy manufacturing zone bordering the Great Lakes. We argue that a lack of competition in labor and output markets in the Rust Belt were responsible for much of the region's decline. We formalize this theory in a dynamic general-equilibrium model in which productivity growth and regional employment shares are determined by the extent of competition. When plausibly calibrated, the model explains roughly half the decline in the Rust Belt's manufacturing employment share. Industry evidence support the model's predictions that investment and productivity growth rates were relatively low in the Rust Belt.

Keywords: Rust Belt, competition, productivity, unionization, monopoly

JEL Classification: E24, E65, J3, J5, L16, R13