As public sector workers get restive and rich donors back off, the Labour Party is being forced to reassess the importance of the trade unions. The balance of power is starting to shift, reports Martin Bright

Strikes are looming in the health service to protect jobs threatened by the NHS funding crisis; speculation is rife over the creation of a merged "mega-union" with power to challenge the government; and the Labour Party is thrown back on union supporters as wealthy individual donors bale out.

These should be heady days for the trade unions. As the TUC prepares to mark the 80th anniversary of the General Strike, which began on 3 May 1926, for the first time in nearly three decades some in the movement are daring to believe that the decline is over and power is returning. It is possible to read the plans for a merger of the Transport and General Workers' Union, Amicus and the GMB into one giant union as a sign of desperation, but the new organisation would be hugely powerful. The largest union at present, Unison, which represents 1.3 million public sector workers, has 20 per cent of Labour's overall membership; the conglomerate would have 40 per cent, giving it a dominant influence within the party.

If it is on the way back, the movement is starting from a low base. Membership has almost halved since the Tories came to power in 1979 determined to undermine union power. And although the unions' financial muscle remains, they no longer occupy a central place in the nation's consciousness. The number of people who have never been a union member now outnumbers those who are, or have been, members.

The traditional May Day rally will highlight the campaign for a trade union freedom bill to reverse the anti-union legislation of the past two decades. But is anyone listening? The radical-sounding leaders of the "big four" unions - Amicus, TGWU, GMB and Unison - may talk about a "fighting back" strategy, but there has been no national mobilisation to support job losses in the car industry, while threatened industrial action over civil service pensions has come to nothing.

The decline of the movement has coincided with a period under Tony Blair when the Labour Party has been accused of abandoning its working-class roots. Amid talk of core Labour voters preparing to vote for the far-right British National Party in the local elections on 4 May, many local parties are in despair. What is surprising is not the unions' dissent, but their loyalty. As members desert new Labour in droves, in some parts of the country it is only union activists who are keeping the party alive.

There are some within Labour who see signs of hope amid the gloom. The Dagenham MP, Jon Cruddas, on the eve of last year's conference, warned the party not to abandon its old support base in the chase for middle-class voters. He says there are a number of younger trade unionists and shop stewards involved in organising against the far right in east London. "The GMB has been very good at galvanising its members to fight the BNP on the ground," he says.

Cruddas claims that the metropolitan political class that dominated thinking in the party in the 1990s completely misread the future of the labour market by predicting a growth in the so-called "knowledge economy" without realising that the real employment boom would come from a far less glamorous sector. "We were all so seduced by the idea of the knowledge economy, but if you look empirically at where the jobs are being generated, it is in the low-wage, low-skilled service sector, often using migrant labour," he says. "This makes me quite optimistic for the future of the unions. The working class is still around, and arguably it needs more representation than ever before."

There are few who share Cruddas's more sanguine outlook, however. Professor Gregor Gall, of the Centre for Research in Employment Studies at the University of Hertfordshire, identifies a complacency at the heart of trade-union decline. Because membership has levelled off at just over six million, some in the leadership believe they have weathered the storm. "They have staved off the worst aspects of decline because union membership is not falling as greatly as it was," he says. "But this relative level of success, paradoxically, may be an impediment to further growth." Even when unions have the upper hand in a dispute, Gall sees a lack of confidence that makes them reluc- tant to press home an advantage. "I have never understood why union leaders suspend the threat of industrial action at the first offer of talks. There is a lot of posturing by leaders, but then they rarely deliver."

John Hannett, general secretary of the Union of Shop, Distributive and Allied Workers, was one of the sponsors of a Fabian Society pamphlet, Raising Lazarus, published last December, which concluded that the unions were "stuck in the past, fighting battles in a class war that is of little relevance to most people today". He said the biggest problem was persuading young people to join unions. "There is a generation gap. Where it was once traditional to join a union, young people are more forensic. Unions have to accept that the ground has shifted." Hannett, who refuses to sign up to the fighting back strategy of the big unions, believes that the way forward lies in ruthless modernisation. He talks in the language of a management guru about unions becoming "fit for purpose", giving members "the right offer" and "thinking outside the box".

It is easy to mock this kind of talk, but Usdaw is on the front line of changes in the labour market and represents an ever-shifting workforce that can easily become atomised and isolated. Yet Hannett knows that his union remains highly centralised despite embracing business models. As you read this, delegates to the union's annual conference gather to debate a campaign against the extension of Sunday shopping hours: an important issue, but hardly the thing to get young people rushing to the barricades.

It may seem hard to believe, but union activism was once fashionable. The young Tony Blair, always keen to follow the zeitgeist, built his early legal career as an employment lawyer working for the unions and even wrote the odd article for this magazine about his passion for the issue.

There are those who believe union activists should ally themselves with activists for broader political causes, such as those involved in the anti-war and anti-globalisation movements, to attract younger members. But there are problems with this approach, not least in Iraq, where some trade unionists supported the overthrow of Saddam Hussein and remain angry with the British left for opposing the war.

Elsewhere, the unglamorous, everyday business of trade unions goes on. Amid criticism of the larger organisations for failing to turn around the tanker, there is a general consensus that the leadership of the TGWU has done most to stem the decline. Its deputy general secretary, Jack Dromey, has presided over a drive to halt the decline in membership and rebuild the shop steward movement across the country. This is unglamorous, incremental work, yet by targeting workplaces at companies such as Sainsbury's and easyJet, Dromey's organisers have recruited 500 new shop stewards and 11,500 new members. The union spends £3m on organising. In a merged union, that figure could rise to £20m, or 10 per cent of all income.

Downing Street sensed conspiracy from the moment Dromey went public on the "loans-for-honours" controversy, but it is difficult to challenge his commitment to workers' rights. The man who came to the fore during the strike of the Grunwick film-processing workers in the 1970s has always believed in the importance of grass-roots activism. Dromey may go down in history as the treasurer who saved the Labour Party from itself by blowing the whistle on the loans scandal. Will he also be credited with saving the trade union movement?

History of struggle

1868
The Trades Union Congress was founded as an umbrella organisation representing most of the unions in Britain.

192-22
Series of strikes as miners and engineers were locked out and forced to take pay cuts. Transport and rail union leaders accused of betrayal on Black Friday (15 April 1921), after announcing they would not strike in support.

1926
Three million key workers went on strike after the TUC called for them to support the miners' dispute over pay and conditions. After only nine days the TUC agreed to end the strike, amid criticism of its lack of support for workers.

1929
Ramsay MacDonald's Labour government was elected after gaining the votes of workers who had been disillusioned by industrial action.

1945
National Union of Mineworkers founded under Clement Attlee's Labour government. World Federation of Trade Unions unites international movement.

1971
The Industrial Relations Act limited "wildcat strikes", making it compulsory for strikers to gain official authorisation. It also imposed limits on legitimate strikes and established the National Industrial Relations Court, which had the power to grant injunctions preventing strikes.

1979
Thatcher elected, leading to a series of laws to curb union power. Secondary action, or "sympathy strikes", outlawed and picketing restricted.

1984-85
Miners' strike. The NUM called a national strike after Thatcher announced that Cortonwood Colliery in Yorkshire would be the first of 20 pits to be closed, making 20,000 people unemployed.

1993
Public service unions merged to create Unison, the biggest union in Britain.

1995
A TUC-backed campaign was launched for a trade-union freedom bill that would roll back the anti-union laws. Unions are mobilising support for the bill around the 2006 May Day events.

Research by Martha Moss

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