The End of the Keynesian Consensus and US Wage Growth: An Empirical Study of the Role of Union Density and the War on Drugs

Macroeconomists have treated wage growth as primarily driven by price and productivity growth, and debate the impact of business cycles on real-wage growth. This paper argues that the breakdown of the Keynesian Consensus that framed many postwar macroeconomic labor-market institutions (unemployment compensation, welfare, the National Labor Relations Board (NLRB), unions, and collective bargaining) has a negative impact on labor militance, and disturbed macroeconomic relationships. It provides evidence that declining union density, and the expanding War on Drugs, reduced both nominal and real wage growth. It finds no evidence that productivity growth benefits wages, and clear evidence that inflation substantially reduces real-wage growth. JEL Classification: E3, J3, J5, J7