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. Structural Unemployment

    A longer-lasting form of unemployment caused by fundamental shifts ...
  6. Unemployment Insurance

    A source of income for workers who have lost their jobs through ...
Related Articles
  1. Personal Finance

    Understanding Natural Unemployment

    Natural unemployment is often defined as the lowest rate of unemployment an economy will reach.
  2. 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 ...
  3. Insights

    The Downside of Low Unemployment

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

    How The Unemployment Rate Affects Everybody

    Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate and how it affects everyone.
  5. Personal Finance

    Understanding Frictional Unemployment

    Frictional unemployment is one aspect of natural unemployment, which is unemployment caused by things other than an underperforming economy.
  6. Personal Finance

    Where Unemployment Hits Hardest

    A look at the demographics of unemployment, and what that means for workers around the nation.
  7. Personal Finance

    U.S. Labor Participation Rate at Record Lows

    In absolute terms, labor participation hit an all-time low.
  8. Insights

    The True Unemployment Rate: U6 Vs. U3

    Learn how to distinguish between the U-3 and U-6 unemployment rates, and explore which rate provides a truer picture of unemployment.
  9. Investing

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
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. 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 >>
  3. What is the difference between structural unemployment and cyclical unemployment?

    Learn more about about the differences between structural and cyclical unemployment and when cyclical unemployment becomes ... Read Answer >>
  4. What is the difference between frictional unemployment and structural unemployment?

    Learn about structural unemployment and frictional unemployment, the differences between the two and their main characteristics. Read Answer >>
  5. What's the difference between cyclical unemployment and seasonal unemployment?

    Learn about the key differences between cyclical and seasonal unemployment. Read about distinguishing features of each of ... Read Answer >>
Hot Definitions
  1. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  2. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  3. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  4. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
Trading Center