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

Some regions of the United States fared much worse than others since the end of WWII. In this paper we document that those regions faring worst in terms of wage and employment growth from 1950-2000 tended to be those in which workers earned the largest wage premiums in 1950. We use this evidence to develop a theory of the decline of the ``Rust Belt'' region, which was highly unionized and paid workers substantially more than other workers of similar skill levels. We develop our theory in a two-region, open-economy version of the Neoclassical Growth model, which we parameterize to match key features of regional and aggregate data. We then use the model to ask how much differently the Rust Belt would have fared if its labor market had not been as distorted.