Competition and Productivity Growth in the Rust Belt

Simeon Alder, David Lagakos and Lee Ohanian

Executive Summary:

The “Rust Belt,” the heavy manufacturing region bordering the Great Lakes, fared worse than any other region of the United States in the post-World War II period in terms of employment and value added. In addition to the evolution of the employment share itself, we document three salient facts and analyze how they accounted for the region’s decline: (1) wages in the Rust Belt were substantially higher in the 1950-80 period, (2) productivity growth in key Rust Belt industries was low compared to other manufacturing industries and compared to the same industries abroad, and (3) competition in domestic output markets for these Rust Belt products was weak between the 1950s and mid-1980s. The Rust Belt’s downturn was largely homemade and persistent labor market conflict plays a key role in explaining all the salient facts. The region’s decline has little, if anything, to do with structural change and foreign competition. While manufacturing in Wisconsin mirrored the trajectory of the broader Rust Belt in the early post-war decades, we observe a distinct shift in the state’s labor relations in the 1980s, which, in turn, set in motion a recovery of manufacturing employment relative to both the Rust Belt region and the United States more broadly. The trajectory of Wisconsin’s manufacturing sector since World War II suggests that flexible labor markets are key for the creation of sustainable manufacturing jobs, and plausibly jobs in general.

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