Non-Accelerating Inflation Rate of Unemployment (NAIRU)

Definition

The non-accelerating inflation rate of unemployment (NAIRU) is the level of unemployment below which inflation begins to accelerate. It represents the unemployment rate at which the economy is operating at full capacity without experiencing rising inflation.

5 Must Know Facts For Your Next Test

1. NAIRU is the unemployment rate at which inflation is stable and not accelerating.
2. The NAIRU is considered the natural rate of unemployment, as it represents the level of unemployment that the economy will gravitate towards in the long run.
3. Factors that can influence the NAIRU include the efficiency of the labor market, the bargaining power of workers, and the degree of labor market rigidities.
4. The NAIRU is an important concept in macroeconomic policy, as it helps policymakers determine the appropriate level of unemployment to target in order to maintain stable inflation.
5. Estimates of the NAIRU can vary over time and across countries, and are often subject to uncertainty and debate among economists.

Review Questions

• Explain the relationship between the NAIRU and the Phillips Curve.
  • The NAIRU is closely related to the Phillips curve, which depicts the inverse relationship between unemployment and inflation. The NAIRU represents the point on the Phillips curve where inflation is stable and not accelerating. When the unemployment rate is below the NAIRU, the economy is operating at a level that leads to rising inflation, while when the unemployment rate is above the NAIRU, the economy experiences falling inflation. Understanding the NAIRU is crucial for policymakers to manage the tradeoff between unemployment and inflation as depicted by the Phillips curve.
• Describe the factors that can influence the level of the NAIRU.
  • The NAIRU can be influenced by a variety of factors, including the efficiency of the labor market, the bargaining power of workers, and the degree of labor market rigidities. For example, if the labor market is more efficient, with better matching of workers to jobs and lower search frictions, the NAIRU may be lower. Similarly, if workers have less bargaining power, the NAIRU may be lower as wage pressures are less likely to lead to accelerating inflation. Conversely, if there are more labor market rigidities, such as strict employment regulations or high minimum wages, the NAIRU may be higher as the economy struggles to reach full employment without triggering inflation.
• Analyze the importance of the NAIRU concept for macroeconomic policymaking.
  • The NAIRU concept is crucial for macroeconomic policymaking, as it helps policymakers determine the appropriate level of unemployment to target in order to maintain stable inflation. By understanding the NAIRU, policymakers can make more informed decisions about monetary and fiscal policies that aim to achieve full employment without triggering accelerating inflation. If the unemployment rate falls below the NAIRU, policymakers may need to tighten monetary policy to cool the economy and prevent inflation from spiraling upward. Conversely, if the unemployment rate is above the NAIRU, policymakers may need to implement expansionary policies to stimulate the economy and reduce unemployment. The NAIRU, therefore, serves as a crucial guide for policymakers in navigating the delicate balance between unemployment and inflation.

Related terms

Phillips Curve:

The Phillips curve is a graphical representation of the inverse relationship between the unemployment rate and the inflation rate in an economy.

Full Employment:

Full employment is the situation where everyone who is willing and able to work at the prevailing wage rate is employed.

Inflation:

Inflation is the sustained increase in the general price level of goods and services in an economy over time.