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Supply Constraints on Employment and Output: NAIRU Versus Natural Rate

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Abstract

NAIRU and NATURAL RATE are not synonymous. NAIRU is a macro outcome of an economy with many labor markets in diverse states of excess demand and excess supply. NAIRU represents an overall balance between the inflation-increasing pressures from excess-demand markets and the inflation-decreasing pressures from excess-supply markets. The natural rate, as described by Friedman, is a feature of Walrasian market-clearing general equilibrium. While the NAIRU fits into a Keynesian model, the natural rate is an aspect of a New Classical model. The determinants of the two are theoretically different, and so are their implications for policy. The NAIRU varies from time to time as the relationships between unemployment, vacancies, and wage changes vary, and as the dispersion of excess demands and supplies across markets changes. In this decade, these developments appear to be reducing the NAIRU, in contrast to the unfavorable circumstances of the 1970s.

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File URL: http://cowles.econ.yale.edu/P/cd/d11b/d1150.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1150.

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Length: 25 pages
Date of creation: Apr 1997
Date of revision:
Handle: RePEc:cwl:cwldpp:1150

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  1. Martin Neil Baily & James Tobin, 1977. "Macroeconomic Effects of Selective Public Employment and Wage Subsidies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 511-544.
  2. 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.
  3. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
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Cited by:
  1. Alasdair Scott, 2000. "Stylised facts from output gap measures," Reserve Bank of New Zealand Discussion Paper Series DP2000/07, Reserve Bank of New Zealand.
  2. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2006. "The (Ir)relevance of the NRU for Policy Making: The Case of Denmark," Working Papers 580, Queen Mary, University of London, School of Economics and Finance.
  3. Grant, Alan P., 2002. "Time-varying estimates of the natural rate of unemployment: a revisitation of Okun's law," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 95-113.
  4. Božena Kadeřábková & Emilie Jašová, 2011. "Analysis of the Indicator NAIRU on the Sector Level," Politická ekonomie, University of Economics, Prague, vol. 2011(4), pages 508-525.
  5. Emilie Jašová & Božena Kaderábková, 2012. "Comparing NAIRU and Economic Cycle from the Perspective of Labour Market in the Countries of the Visegrad Group," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 3-23.
  6. Salvatore D'Acunto & Sergio Destefanis & Marco Musella, 2004. "Exports, Supply Constraints and Growth: An Investigation using Regional Data," International Review of Applied Economics, Taylor & Francis Journals, vol. 18(2), pages 167-189.

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