While the United States as a whole saw robust increases in economic activity over the postwar
period, the economic performance of regions within the country was highly unequal. In
this paper we document that the regions that fared relatively worst in terms of wage and employment
growth were those that paid workers the largest wage premiums in 1950. We use this
evidence to develop a theory of the decline of the “Rust Belt,” the highly-unionized manufacturing
zone around the Great Lakes. Our theory is that limited competition in labor markets and
output markets in the Rust Belt was responsible for much of the region’s decline. We formalize
the theory in a dynamic general equilibrium model in which productivity growth and regional
employment shares are determined by the extent of competition. Evidence from prominent
Rust Belt industries supports the model’s prediction that investment and productivity growth
rates were relatively low in the Rust Belt.