Non Accelerating Inflation Rate of Unemployment is the level of unemployment
at which inflationary pressures in the economy are stable. According to
supply-side economists, unemployment cannot be held permanently below its
argue if actual unemployment falls below the natural rate (i.e. equilibrium
unemployment) - there is upward pressure on wage inflation that then feeds
into general price inflation.
changes in unemployment do have an effect on the risk of inflation. Consider
this comment from the Bank of England.
in the labour market are a key determinant of domestically generated
inflation." (UK Monetary Policy Committee minutes)
unemployment falls towards the NAIRU, skill shortages exert upward pressure
on wages and producer prices, until any further falls in unemployment lead to
future higher inflation.
Determines The Nairu?
NAIRU can and does vary between
countries and changes over time for any one particular economy.
rate of unemployment at which inflation starts to accelerate is determined by
the efficiency of the labour market and the relative strength of employers
and employees in the wage bargaining process
The changing nature of
the wage bargaining process
of Trade Unions - Unions
have become much less powerful in the UK over the last twenty years. This has
tilted the balance of power towards employers and helped to keep
"inflation-busting" pay claims in check
/ decentralisation of pay bargaining
There has been a switch towards local and regional pay settlements that can
take more account of local differences in labour demand and supply
of involuntary structural unemployment in the economy
- measures to reduce structural unemployment should help to reduce the NAIRU
if effective. This is because they increase the available labour supply in
of product markets - impact on producers and labour
markets are more competitive there is intensive pressure on firms to
control costs. Wage increases might only be justified by improvements in
effects on wage bargaining
economy can be affected by external
economic shocks that effect expected inflation.
The global economic
crisis in 1998 has brought down expectations of inflation
The fall in
international commodity prices has had a similar effect - causing a sharp
fall in inflation in many countries across the world. Lower input costs cause
an outward shift in short run aggregate supply in the economy and should help
to increase the real volume of national output
economists believe that the natural rate of unemployment has fallen in the UK
over the last decade. This means that the economy can sustain a lower rate of
unemployment without triggering off a renewed burst of wage inflation. The
evidence supports this positive view often improving trade-off between
unemployment and wage/price inflation. By the summer of 2000, unemployment in
the UK had fallen to just 3.8% of the labour force (using the claimant count
measure) whilst retail price inflation had remained comfortably within the
government's target (2.5%0 and wage inflation was under control.
at the OECD have estimated the NAIRU for the leading industrialised
countries. Their estimates for 1997 are shown in the chart below. The UK
comes out favourably in this international comparison. Our estimated NAIRU is
substantially below that of Germany and France - although some way above that
for the United States and Japan. The Netherlands (another country to have
introduced widespread labour market reforms over the last fifteen years) is
also estimated to have a lower NAIRU than the UK.