Many rational wage setting schemes, such as the trade unions paradigm,
are usually thought to lead to pure real rigidities. In this article
we construct a model where a rational trade union without any kind of
money illusion sets wage schedules in an economy subject to real and m
onetary shocks. We make the realistic assumption that wages can be con
ditioned on prices. It is found that, although the trade union has the
option of fully insulating workers from nominal disturbances, it will
rationally choose not to do so, and therefore nominal rigidities will
be present in the economy.