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

Simeon Alder, David Lagakos, and Lee Ohanian
CQER Working Paper 14-05
August 2014

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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.

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

Key words: Rust Belt, competition, productivity, unionization, monopoly

The authors thank Ufuk Akcigit, Marco Bassetto, Pablo Fajgelbaum, Jeremy Greenwood, Berthold Herrendorf, Tom Holmes, Alejandro Justiniano, Thomas Klier, Andrea Pozzi, Ed Prescott, Jim Schmitz, Todd Schoellman, Marcelo Veracierto, Fabrizio Zilibotti, and seminar participants at Arizona State, Autonoma de Barcelona, British Columbia, the Federal Reserve Banks of Chicago and St. Louis, Frankfurt, Notre Dame, Pennsylvania, UCLA, Zurich, the 2012 Einaudi Roma Macro Junior conference, and the 2012 SED meetings (Cyprus) for helpful comments. The authors thank Andrew Cole, Alex Hartman, Patrick Orr, Samin Peirovi, Billy Smith, and especially Glenn Farley for excellent research assistance. The views expressed here are the authorsâ?? and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authorsâ?? responsibility.

Please address questions regarding content to Simeon Alder, Notre Dame University, Department of Economics, 715 Flanner Hall, Notre Dame, Indiana 46556, 574-631-0373,; David Lagakos, University of California, San Diego, Department of Economics 0508, 9500 Gilman Drive, La Jolla, California 92093-0508,; or Lee Ohanian, UCLA, Department of Economics, 405 Hilgard Avenue, Los Angeles, California 90024, 310-825-0979,

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