natural rate of unemployment

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Non-Accelerating Inflation Rate of Unemployment

Also called NAIRU. The unemployment rate in an economy below which inflation will begin to rise. The idea behind NAIRU states that a certain unemployment rate is built in to an economy. If unemployment falls too far, the economy will begin to overheat and inflation will rise. This analysis is highly controversial; some economists hold full employment is possible without these negative side effects. Milton Friedman was a major proponent of the NAIRU idea. See also: Phillips curve.
Natural rate of unemploymentclick for a larger image
Fig. 134 Natural rate of unemployment. Phillips curve depicting the natural rate of unemployment.

natural rate of unemployment

the underlying rate of UNEMPLOYMENT below which it is not possible to reduce unemployment further without increasing the rate of INFLATION. The term ‘natural rate of unemployment’ is often used synonymously with the NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT (NAIRU).

The natural rate of unemployment can be depicted by reference to the PHILLIPS CURVE.

In Fig. 134, the rate of unemployment is shown on the horizontal axis and the rate of inflation is shown on the vertical axis, with the Phillips curve showing the ‘trade-off between unemployment and inflation. Point X, where the Phillips curve intersects the horizontal axis, depicts the natural rate of unemployment. If unemployment is pushed below the natural rate of unemployment (currently estimated at around 5% in the UK), then inflation starts to accelerate. The natural rate of unemployment includes FRICTIONAL UNEMPLOYMENT, STRUCTURAL UNEMPLOYMENT and, in particular, ‘voluntary’ unemployment (people who are out of work because they are not prepared to take work at the ‘going’ wage rate). See main UNEMPLOYMENT entry for further discussion.

However, the term ‘natural’ rate of unemployment is somewhat a misnomer insofar as it implies that it is ‘immutable’. This is far from the case, as the natural rate of unemployment can vary between countries and also within countries over time. Structural unemployment, for example, can be reduced by training schemes that improve occupational mobility while ‘voluntary’ unemployment can be reduced by lowering the ‘cushion’ of social security benefits and improving incentives to work (e.g. the Working Families’ Tax Credit Scheme). See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE.

References in periodicals archive ?
This golden node or to say equilibrium unemployment rate is a dynamic phenomenon, constantly changing over time so can't be fixed to 5 or 6% as the theory of natural unemployment rate suggests.
This relationship has been studied since 1960's: the empirical evidence revealed that in the case of the US economy, for every one percent excess of the natural unemployment rate, a 2-3% GDP gap is predicted.
The DSGE models make the sums of coefficients depend on the monetary policy rule via cross-equation restrictions of a type that earlier authors, including Lucas and Sargent, emphasized in the context of testing the natural unemployment rate hypothesis.
This study develops a natural unemployment rate based upon education attainment.
22) On the other hand, my subsequent research endogenizing the natural unemployment rate has since dissociated me from some other core parts of the Keynesian policy position.
In this sense, and adopting as a supposition the possibility of change in work productivity, the fundamental contribution of this article establishes itself, which tries to carry out a measurement of the negative relationship between unemployment in the Posadas, (Misiones) agglomerate, and the growth of the provincial economy during the years 1980-1999, adjusting the natural unemployment rate to the modifications work in productivity.
Economists like Greg Mankiw believe that there are levels of natural unemployment.
In addition, when all the actual variables equal their expected counterparts, a long-run Phillips curve is vertical at the natural unemployment rate and is consistent with any level of inflation rates.
The authors estimate the natural unemployment rate with two such models.
Similar delusion concerning the relationship between actual and natural unemployment is evident in the proceedings of the Reserve Bank of Australia's recent conference on unemployment (Debelle and Borland 1998).
16) Some authors argue that there are substantive differences between NAIRU and natural unemployment but in applications it is common to define natural unemployment as the unemployment rate that follows from a vertical Phillips curve.