Deindustrialisation and Regional Labour Market Divergence: Why Some Cities Bounce Back and Others Don’t

The Uneven Fallout of Industrial Decline

For much of the 20th century, industrial production defined prosperity. The shipyards, auto factories, coal mines, and steel mills that drove national economies were surrounded by thriving cities. These industries influenced the socioeconomic structure of urban and regional life in addition to the physical landscape. However, a significant shift was brought about by the fall of heavy industry, or what economists refer to as deindustrialisation, in the second part of the century. Although many developed economies have gone through this process, the results have been far from consistent. While some regions have successfully made the move to more dynamic and diverse economies, others have experienced long-term stagnation and population loss. The central question that emerges is: why do some cities bounce back from industrial decline while others do not?

This blog explores the economics behind this divergence, drawing on insights from labour and industrial economics. It considers how human capital, industrial structure, policy interventions, and innovation ecosystems interact with local labour markets. Special attention is paid to comparative examples from Japan, the UK, and the United States- countries that each faced the challenges of industrial decline in different ways.

What Is Deindustrialisation and Why Does It Matter?

Deindustrialisation refers to the relative and absolute decline of manufacturing employment and output in an economy. It became particularly prominent from the 1970s onwards, as globalisation, technological change, and domestic policy shifts led to the hollowing out of traditional industrial bases. According to Rowthorn and Coutts (2004), deindustrialisation does not always indicate economic collapse; in certain situations, it merely represents a change to a service-oriented economy brought about by increased industrial productivity. Deindustrialisation, however, can cause structural harm that takes decades to heal in areas that are highly dependent on a single industry.

Deindustrialisation has significant effects on the labour market. Workers with firm-specific or outdated skills are frequently affected by the widespread job displacement caused by the loss of large industrial enterprises. Additionally, it diminishes the local tax base, which lowers public investment and erodes infrastructure, and it causes pay stagnation, particularly among male and middle-skilled workers. A city that once thrived on manufacturing can quickly descend into a cycle of economic decline, unemployment, social disintegration, and out-migration.

The significant study on the "China Shock" by Autor, Dorn, and Hanson (2013) showed how China's increased import competitiveness destroyed American manufacturing jobs, resulting in lower labour force participation and long-term wage repression. Similar outcomes, where entire towns have struggled to recover from the loss of conventional industries, have been documented in Japan and the United Kingdom. The diversity of results is still remarkable; some cities, like Manchester or Pittsburgh, have succeeded in reinventing themselves, while others, like Detroit or Kitakyushu, have failed.

When Industry Dies: Labour Market Scars and Economic Drift

There are repercussions when a large employer closes or a dominant industry declines. Due to a lack of transferable skills or a lack of local prospects, workers frequently struggle to move into new employment. Long-term unemployment results from older workers' decreased likelihood of retraining or moving. On the other side, young people can completely leave the area, depriving it of its potential for future innovation and talent.

Beyond those who are directly impacted, there may be long-term harm to people's employment prospects and earnings due to labour market scarring. Once thriving on industrial income, supporting industries like retail, hospitality, and logistics may contract, leading to a wider economic crisis. Recovery is further hampered by these secondary impacts, which also have an influence on municipal income and result in reductions in spending for public services, infrastructure upkeep, and education.

In Japan, the city of Kitakyushu offers a significant example. Once a steel powerhouse central to Japan’s post-war growth, Kitakyushu entered a deep decline following the collapse of its industrial base in the 1980s and 1990s. Despite efforts to reinvent itself as an “Eco-Town,” pioneering waste recycling and environmental technologies, the city has not managed to replace the lost volume of high-wage, high-productivity industrial employment. Youth outmigration and low birth rates have only compounded the demographic crisis.

A Tale of Two Cities: Why Some Regions Rebound

What distinguishes the cities that recover from those that don’t? Economists have increasingly turned to structural characteristics of regional economies to answer this question. The divergence is not merely about geography or luck - it reflects deep-seated differences in industrial composition, institutional capacity, and human capital development.

Consider the differences between Manchester and Middlesbrough in the UK or Pittsburgh and Detroit in the US. Once known for its steel industry, Pittsburgh has effectively shifted to a knowledge economy focused on robotics, healthcare, and higher education. In contrast, Detroit continued to rely significantly on the car industry, which failed due to both local mismanagement and international competition. In addition to the economic structure of the cities, the institutions they housed and the policy choices made during and after the industrial crisis also had an impact on the cities' different results.

In a comparable way, Nagoya offers a more successful approach in Japan. Despite broader industrial shifts, it has been able to sustain high levels of employment and wage growth thanks to its integration with the automotive and aerospace sectors, especially through its long-standing collaboration with Toyota. An industrial ecosystem that can adapt to shifting global demand by inventing and upgrading is largely responsible for this resilience.

The Power of Industrial Diversity

One important defence against industrial shocks is economic diversification. Areas having a diverse range of sectors are less susceptible to downturns in any one of those businesses. Diversified economies not only preserve jobs but also promote innovation by allowing information to flow across sectors.

The ascent is considerably steeper for mono-industrial cities. They lose not only their jobs but also their identity, purpose, and institutional knowledge when their dominant industry fails. Sheffield's and Kitakyushu's historical reliance on steel and cutlery manufacturing in the UK left them especially vulnerable to long-term decline. Recovery is nearly totally dependent on outside intervention in the absence of an established base of alternative industries, whether in the form of targeted innovation support, business migration, or public investment.

Nagoya, in contrast, was able to leverage its diverse manufacturing base to cushion the blow of sector-specific downturns. Its ability to pivot within high-value industrial sectors - from autos to aerospace and precision manufacturing - helped maintain employment and attract inward investment.

London then and now - Ted Thornhill & Jason Hawkes

Human Capital and the Capacity to Adapt

Without human capital, a city cannot reinvent itself. Attracting new industries and allowing people to move between sectors depend on having a workforce that is educated and skilled. Universities, technical institutions, and retraining programs are essential for giving employees the skills they need for new sectors.

Institutions like Carnegie Mellon University and the University of Pittsburgh, which anchored a new economy in biomedical research, robotics, and information technology, were crucial to Pittsburgh's recovery. Similar strategies have been employed by UK cities like Leeds to support the expansion of the service industry, while Glasgow has leveraged its universities to strengthen its digital economy.

Japan has particular difficulties in this area. Despite having top-notch research institutes and universities, its job market's rigidity has made mobility difficult. The capacity of displaced workers to retrain and transition into higher-value professions is hampered by the continuation of the dual labour market, where "regular" workers enjoy job security and benefits while "non-regular" workers continue to hold precarious positions. Furthermore, quick adaption is more challenging in Japan due to the country's cultural propensity for long-term work and little mid-career mobility. Because of this, retraining programs are frequently underutilised or poorly targeted, even when they do exist.

Innovation, Institutions, and Industrial Strategy

Innovation ecosystems are critical for creating high-quality jobs in post-industrial economies. Public-private partnerships, research and development (R&D), and access to venture capital help generate the new industries that cities need to survive and thrive.

The role of government is central in this process. In Japan, the Ministry of Economy, Trade and Industry (METI) launched the Industrial Cluster Project in the early 2000s to foster innovation-driven regional economies. While clusters in Aichi and Kansai gained traction, others struggled due to a lack of critical mass and insufficient coordination between academia, firms, and government. Tokyo’s dominance also continues to drain resources and talent from the regions, making it harder for smaller cities to build innovation ecosystems of their own.

In contrast, cities like Munich in Germany or Eindhoven in the Netherlands demonstrate how targeted investment in innovation, linked to existing industrial strengths, can yield sustained employment growth. These models suggest that smart industrial strategy - tailored to regional assets - can overcome the drag of industrial decline.

Labour Market Structures and the Role of Institutions

In periods of structural change, workers' flexibility, mobility, and protection are determined by labour market institutions. Workers have more flexibility but less protections in liberal market economies like the US. Stronger job protections can lessen short-term suffering in integrated economies like Germany and Japan, but they may also delay long-term adjustment.

The dual labour market in Japan has resulted in a divided industrial transformation experience. Ordinary workers are less mobile but more secure because they are frequently protected within domestic labour markets. On the other hand, non-regular workers are confined to low-paying, unstable positions with limited opportunities for training or career advancement. In the post-industrial age, Japan has found it more difficult to efficiently redeploy manpower due to this institutional rigidity.

The effectiveness of retraining and job matching services also plays a role. Evidence from the UK and Germany suggests that proactive labour market policies, especially when linked to industry needs, can ease transitions and reduce unemployment durations. But in many struggling regions, underfunded or poorly targeted retraining schemes have failed to deliver results.

Policy Paths: Reviving Places or Moving People?

A major debate in economics concerns whether governments should focus on helping individuals move to thriving areas (people-based policy) or attempt to revive struggling regions (place-based policy). While the former may be more efficient in theory, it often ignores the social, cultural, and political importance of place.

The election of Donald Trump in the United States, the Brexit vote in the United Kingdom, and the depopulation of rural areas in Japan all highlight the political ramifications of perceived regional desertion. There is increasing agreement that a people-based strategy alone might be too limited. When included into a well-thought-out national strategy, well-thought-out place-based tactics, such as industry targeting, tax incentives, and infrastructure investment, can succeed.

Japan has made a variety of initiatives at regional revitalisation. Although there have been some successful initiatives, many are still merely symbolic or lack adequate funding, such as the Comprehensive Strategy for Regional Revitalisation (2014) and Smart City frameworks. These initiatives struggle to produce significant labour market results in the absence of longer-term investment and more thorough structural reform.

The Political and Demographic Consequences of Regional Decline

Economic downturns don't just happen. Persistent unemployment and income stagnation have serious social and political repercussions for the affected areas. Deindustrialisation and demographic ageing are closely related in Japan. Older populations stay in underfunded places, fertility drops, and young people move away. As a result, the economic and political disparity in the region is growing.

Regional resentment has encouraged populism, anti-globalisation sentiment, and mistrust of central governments in the US and the UK. National cohesion is at danger if the geographic distribution of economic opportunity increasingly corresponds with political divisions. The reality that employment dynamics have far-reaching effects outside of the workplace is now a challenge for labour economists.

Conclusion: Avoiding a Two-Speed Economy

Deindustrialisation is not inevitable; but, market forces alone are not enough to ensure a successful recovery. Resilient cities and regions do so because they have, or are assisted in developing, the following components: long-term investment, innovation systems, skilled labour, industrial diversification, and institutional flexibility.

If governments fail to address the growing divergence between thriving and struggling regions, the result may be a two-speed economy marked by prosperity for some and abandonment for others. For labour and industrial economists - and for policymakers - the task ahead is to craft interventions that are not only economically sound but socially just and politically sustainable.

References

Brey, B. and Rueda, D., 2024. The Persistent Human Costs of Deindustrialisation: Lessons from the Collapse of the British Coal Industry. Centre for Economic Policy Research. Available at: https://cepr.org/voxeu/columns/persistent-human-costs-deindustrialisation-lessons-collapse-british-coal-industry

El Mokri, K., 2024. Exploring Employment (De-)Routinisation, Premature Deindustrialisation, and Informal Labour Interactions: Evidence from Morocco. The Economic and Labour Relations Review, 35(3), pp. 370–398. Available at: https://www.cambridge.org/core/services/aop-cambridge-core/content/view/F96387C44C02CD53F5339ADCB99512D4/S1035304624000231a.pdf/exploring_employment_deroutinisation_premature_deindustrialisation_and_informal_labour_interactions_evidence_from_morocco.pdf

Rowthorn, R. and Coutts, K., 2004. De-industrialisation and the Balance of Payments in Advanced Economies. Cambridge Journal of Economics, 28(5), pp.767–790. Available at: https://academic.oup.com/cje/article-abstract/28/5/767/1729959

Davis, D.R., Mengus, E., and Michalski, T.K., 2024. Labor Market Polarization and The Great Urban Divergence. National Bureau of Economic Research. Available at: https://www.nber.org/system/files/working_papers/w26955/w26955.pdf

Hawkes, J., 2020. London from above: Amazing aerial photos document the UK capital’s growth. Daily Mail Online, 28 September. Available at: https://www.dailymail.co.uk/travel/escape/article-8772381/London-Amazing-Jason-Hawkes-aerial-photos-document-UK-capitals-amazing-growth.html