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Time to Ditch the NAIRU

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  • James K. Galbraith
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    Abstract

    The concept of a natural rate of unemployment, or nonaccelerating inflation rate of unemployment (NAIRU), remains controversial after twenty-five years. This essay presents a brief for no-confidence, in four parts. First, the theoretical case for the natural rate is not compelling. Second, the evidence for a vertical Phillips curve and the associated accelerationist hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak. Third, economists have failed to reach professional consensus on estimating the NAIRU. Fourth, adherence to the concept as a guide to policy has major social costs but negligible benefits.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.11.1.93
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 11 (1997)
    Issue (Month): 1 (Winter)
    Pages: 93-108

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    Handle: RePEc:aea:jecper:v:11:y:1997:i:1:p:93-108

    Note: DOI: 10.1257/jep.11.1.93
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    1. Ray C. Fair, 1996. "Testing the Standard View of the Long-Run Unemployment-Inflation Relationship," Cowles Foundation Discussion Papers 1121, Cowles Foundation for Research in Economics, Yale University.
    2. Robert E. Hall, 1970. "Why Is the Unemployment Rate So High at Full Employment?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(3), pages 369-410.
    3. Charles Adams & David T. Coe, 1990. "A Systems Approach to Estimating the Natural Rate of Unemployment and Potential Output for the United States," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 232-293, June.
    4. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    5. Robert E. Hall, 1978. "A Theory of the Natural Unemployment Rate and the Duration of Employment," NBER Working Papers 0251, National Bureau of Economic Research, Inc.
    6. Lucas, Robert E, Jr, 1981. "Tobin and Monetarism: A Review Article," Journal of Economic Literature, American Economic Association, vol. 19(2), pages 558-67, June.
    7. Gordon, David M, 1988. "The Un-natural Rate of Unemployment: An Econometric Critique of the NAIRU Hypothesis," American Economic Review, American Economic Association, vol. 78(2), pages 117-23, May.
    8. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1991. "Why Has the Natural Rate of Unemployment Increased over Time?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 75-142.
    9. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
    10. George L. Perry, 1970. "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(3), pages 411-448.
    11. Rockoff,Hugh, 1984. "Drastic Measures," Cambridge Books, Cambridge University Press, number 9780521244961, April.
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