For more than 60 years, since the long depression of the 1920s in Great Britain, the key problem in macroeconomics has been the explanation of unemployment, which is seemingly involuntary and varies with aggregate demand. Most markets seem to clear, but not the labor market. Why? Even in the absence of major real shocks, such as materials shortages, there are large fluctuations in output that seem to be correlated with aggregate demand. Why?

An answer to these questions was given by Pigou and Keynes in the 1930s: With sticky money wages, labor markets will not clear if demand is low, and decreases in demand will usually cause decreases in output and increases in unemployment. But, in economics as in child-rearing, answers usually beget further questions. This challenge, which did not arise until almost 35 years after the publication of The General Theory (Keynes, 1936), resulted in the inevitable questions: Why should money wages be sticky? Do sticky wages correspond to rational economic behavior? And, if sticky wages are not rational, is there another way to explain business cycles in the absence of sticky money wages?

Attempts to answer these questions have led to a sequence of important developments: search theory, the new classical macroeconomics, implicit contract theory, and staggered contract theory, all of which have been interesting and some of whose results have been surprising indeed.