ABSTRACT
It has long been a common claim in Macroeconomics that trade unions cause wages to be sticky but employment to be highly variable over the business cycle. However, union behaviour is typically modelled in an unsatisfactory way. The unions are simply assumed to defend some historically given wage rate and to pay no attention to the employment consequences of their actions. Recent work by McDonald and Solow (1981) suggests that even when firms and unions bargain over both employment and wages, relatively stable wage rates and highly variable employment levels may arise. Their analysis is suggestive but is partial equilibrium in character, as they recognise. (1)
