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The NAIRU - Concept: A Few Remarks

  • Pichelmann, Karl

    (Department of Economics, Institute for Advanced Studies, Vienna)

  • Schuh, Andreas-Ulrich

    (Ministry of Finance, Vienna)

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    This note gives a brief survey of main theoretical and empirical issues with respect to the NAIRU concept. According to modern labour market literature NAIRU is defined as the rate of unemployment at which inflation stabilizes in the absence of any wage-price surprises. Conventional thinking about the equilibrium unemployment rate assumes that in the long run NAIRU is determined solely by supply side factors of the labour market. We show that quite complex adjustment dynamics may arise even in simple log-linear wage-price models. Furthermore we provide a survey on a number of "hysteresis-mechanisms" which could lead to permanent shifts of equilibrium unemployment over time, implying that an unique long run NAIRU may not even exist. In addition to theoretical issues we refer to two serious problems which might arise with empirical applications of the NAIRU concept. First various empirical studies suggest that results highly depend on model specifications. Second a considerable amount of statistical imprecision is inherent in the results obtained from empirical estimates. For these reasons, we argue, that policy conclusions drawn from the NAIRU concept must be judged with utmost care, particularly since in many countries a number of labour market measures as well as monetary policy are based on this concept.

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    File URL: http://www.ihs.ac.at/publications/eco/es-36.pdf
    File Function: First version, 1996
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    Paper provided by Institute for Advanced Studies in its series Economics Series with number 36.

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    Length: 20 pages
    Date of creation: Sep 1996
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    Handle: RePEc:ihs:ihsesp:36
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    1. Setterfield, M. A. & Gordon, D. V. & Osberg, L., 1992. "Searching for a will o' the wisp : An empirical study of the NAIRU in Canada," European Economic Review, Elsevier, vol. 36(1), pages 119-136, January.
    2. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
    3. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, March.
    4. Lindbeck, Assar & Snower, Dennis J, 1994. "How Are Product Demand Changes Transmitted to the Labour Market?," Economic Journal, Royal Economic Society, vol. 104(423), pages 386-98, March.
    5. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
    6. Pagano, Marco, 1990. "Imperfect Competition, Underemployment Equilibria and Fiscal Policy," Economic Journal, Royal Economic Society, vol. 100(401), pages 440-63, June.
    7. Snower, Dennis J, 1983. "Imperfect Competition, Underemployment and Crowding-Out," Oxford Economic Papers, Oxford University Press, vol. 35(0), pages 245-70, Supplemen.
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