What is the 'Non-Accelerating Inflation Rate Of Unemployment - NAIRU'

The non-accelerating inflation rate of unemployment (Nairu) - also referred to as the long-run Phillips curve - is the specific level of unemployment that is evident in an economy that does not cause inflation to rise up. NAIRU often represents equilibrium between the state of the economy and the labor market.

BREAKING DOWN 'Non-Accelerating Inflation Rate Of Unemployment - NAIRU'

In 1958, New Zealand born economist William Phillips wrote a paper titled The Relation between Unemployment and the Rate of Money Wage Rates in the United Kingdom. In his paper, Phillips described the supposed inverse relationship between unemployment levels and the rate of inflation. This relationship was referred to as the Phillips curve. However, during the severe recession of 1974 to 1975, inflation and unemployment rates both reached historic levels and people began to doubt the theoretical basis of the Phillips curve. Milton Friedman and other critics argued that government macroeconomic policies were being driven by a low unemployment target and that caused the expectations of inflation to change. This led to accelerated inflation rather than reduced unemployment. It was then agreed that government economic policies should not be influenced by unemployment levels below a critical level also known as the “natural rate of unemployment."

The Nairu was first introduced in 1975 as the noninflationary rate of unemployment (NIRU) by Franco Modigliani and Lucas Papademos. It was an improvement of the concept of “natural rate of unemployment" by Milton Friedman.

The Correlation Between Unemployment and Inflation

Suppose that the unemployment rate is at 5% and the inflation rate is 2%. Assuming that both of these values remain the same for a period of time, it can then be said that when unemployment is under 5%, it is natural for an inflation rate of 2% to correspond with it. Critics cite that it is unlikely to have a static rate of unemployment that lasts for long periods of time because different levels of factors affecting the workforce and employers (such as the presence of unions and monopolies) can quickly shift this equilibrium.

Theory Properties

The theory states that if the actual unemployment rate is less than the Nairu for a few years, inflationary expectations rise so the inflation rate tends to increase. If the actual unemployment rate is greater than the Nairu, inflationary expectations fall so the inflation rate slows down and there is disinflation. If both unemployment rate and Nairu are equal, the inflation rate tends to stay the same.

RELATED TERMS
  1. Natural Unemployment

    The lowest rate of unemployment that an economy can sustain over ...
  2. Underemployment Equilibrium

    A condition where underemployment in an economy is persistently ...
  3. Phillips Curve

    An economic concept developed by A. W. Phillips stating that ...
  4. Unemployment

    Unemployment occurs when a person who is actively searching for ...
  5. Continuing Claims

    Continuing claims refers to unemployed workers that qualify for ...
  6. Full Employment

    A situation in which all available labor resources are being ...
Related Articles
  1. Insights

    Examining The Phillips Curve

    This model depicts an inverse relationship between unemployment and wage inflation, but is it accurate?
  2. Investing

    How Inflation and Unemployment Are Related

    How can inflation affect unemployment, and vice versa? Here we examine wage inflation, stagflation and the Phillips Curve.
  3. Personal Finance

    Understanding Natural Unemployment

    Natural unemployment is often defined as the lowest rate of unemployment an economy will reach.
  4. Personal Finance

    What "Unemployment" Really Means

    Unemployment occurs when a person who is actively searching for employment is unable to find work. The most frequently cited measure of unemployment is the unemployment rate. This is the number ...
  5. Personal Finance

    Understanding the Unemployment Rate

    The unemployment rate is the percentage of people in the labor force who are unemployed but seeking a job.
  6. Insights

    The Downside of Low Unemployment

    Yes, the unemployment rate can be too low.
  7. Insights

    The Cost of Unemployment to the Economy

    Unemployment carries many costs, both obvious and hidden, for an economy.
  8. Personal Finance

    Understanding Frictional Unemployment

    Frictional unemployment is one aspect of natural unemployment, which is unemployment caused by things other than an underperforming economy.
RELATED FAQS
  1. What happens when inflation and unemployment are positively correlated?

    Learn about the historic relationship between inflation and unemployment and the implications that occur when they are positively ... Read Answer >>
  2. Do rising unemployment rates tend to increase or decrease investor sentiment and ...

    Discover whether rising unemployment rates tend to increase or decrease consumer confidence and investor sentiment. Unemployment ... Read Answer >>
  3. Is there a natural rate of cyclical unemployment?

    Learn more about cyclical unemployment and find out about the relationship of cyclical unemployment to the natural unemployment ... Read Answer >>
  4. How does the U.S. Bureau of Labor Statistics calculate the unemployment rate published ...

    Understand the process used by the U.S. Bureau of Labor Statistics to determine the official unemployment rate for the United ... Read Answer >>
  5. What is the difference between frictional unemployment and structural unemployment?

    Learn about structural unemployment and frictional unemployment, the differences between the two types and their main characteristics. Read Answer >>
  6. What actions or policies can a government agency take to counteract and end stagflation ...

    Find out why stagflation cannot be corrected through traditional fiscal or monetary policy and why it was once thought to ... Read Answer >>
Hot Definitions
  1. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  2. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  3. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  4. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  5. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  6. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
Trading Center