Competitive Pressure and the Decline of the Rust Belt: A Macroeconomic Analysis

By Simeon Alder, David Lagakos and Lee Ohanian

http://d.repec.org/n?u=RePEc:nbr:nberwo:20538&r=dge

No region of the United States fared worse over the postwar period than the “Rust Belt,” the heavy manufacturing region bordering the Great Lakes. This paper hypothesizes that the Rust Belt declined in large part due to a lack of competitive pressure in its labor and output markets. We formalize this thesis in a two-region dynamic general equilibrium model, in which productivity growth and regional employment shares are determined by the extent of competition. Quantitatively, the model accounts for much of the large secular decline in the Rust Belt’s employment share before the 1980s, and the relative stabilization of the Rust Belt since then, as competitive pressure increased.

As a recent resident of the Rust Belt, I find this piece fascinating. Beyond the compelling examples about the lask of competition in the region, collusion among producers, high union power and the lack of technological progress, the paper has a nice model that shows how such inefficiencies could drag down the region. A lesson that could apply to other countries as well.