The non-accelerating inflation rate of unemployment (NAIRU) is a key concept that is used to understand the relationship between inflation and unemployment. It is a theoretical level of unemployment below which inflation will accelerate and above which it will decelerate. It is also known as the “non-inflationary” rate of unemployment or the “natural” rate of unemployment.
The NAIRU represents the level of unemployment at which the economy is operating at its full potential. At this level, the economy is producing at its potential output and there is no slack in the labor market, meaning that all available workers are employed.
This means that when the unemployment rate is below the NAIRU, inflationary pressures are likely to build as employers are forced to bid up wages to attract and retain workers. On the other hand, when the unemployment rate is above the NAIRU, inflationary pressures are likely to ease as workers are readily available and employers do not need to offer high wages to attract them.
The estimation of the NAIRU is a difficult task and economists have developed various methods to estimate it, such as the Phillips Curve, which is a graphical representation of the relationship between unemployment and inflation.
It is important to note that the NAIRU is not a fixed number and can change over time due to factors such as changes in technology, demographics, and government policies. Government policies such as changes in the level of welfare benefits, minimum wages, and collective bargaining can have an impact on the NAIRU.
Central banks also use NAIRU estimates to inform their monetary policy decisions, such as setting interest rates and controlling the money supply to reach the target of low inflation with an acceptable rate of unemployment.
Watch the video below to learn more about the NAIRU in HSC Economics:
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