Introduction

Over the 1980s, macroeconomic modelling increasingly shifted from the Walrasian market-clearing approach to one in which account was taken of the fact that firms, trade unions and governments may be able to act strategically (Dixon and Rankin, 1994). The ‘New Keynesian’ approach to macroeconomics emerged in the 1980s as a response to the inability of the received macroeconomics to explain the phenomena of the period. By this decade, there were changes in the economic performance of all the major advanced economies compared with the 1960s and 1970s. Growth almost halved, unemployment increased dramatically through both the seventies and eighties, and inflation accelerated in the seventies, falling back in the eighties to a level higher than in the fifties and sixties. While most major industrialised countries had a poorer economic performance in the seventies and eighties, there were nonetheless considerable cross-country differences with respect to growth, unemployment and inflation. These changes contributed to a re-evaluation of macroeconomic modelling, of which the ‘New Keynesianism’ emerging in the 1980s was one approach. This new approach produces models with Keynesian features, through modelling the imperfectly competitive behaviour of firms and workers, thereby providing microeconomic foundations for the behaviour of macroeconomic aggregates such as equilibrium unemployment and inflation. In this chapter, we examine the contribution of the recent microeconomic trade union literature to the New Keynesian approach to macroeconomics, and focus in particular on the implications of union behaviour for nominal and real wage rigidity, and for aggregate unemployment.