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Aggregate Demand, Investment and the NAIRU

  • Malcolm Sawyer

    (The Jerome Levy Economics Institute)

The NAIRU (non accelerating inflation rate of unemployment) is generally viewed as a supply-side determined short run equilibrium rate of unemployment. Aggregate demand plays no essential part in the determination of the equilibrium rate of unemployment. In those models from which a NAIRU is derived where aggregate demand makes an appearance, the nature of the model is such that the level of demand adjusts to the level of employment set by the supply-side factors, and those supply-side factors are invariant to the level of demand. The adjustment of aggregate demand can take place through a variety of routes, such as the real balance effect and fiscal stance used to avoid accelerating inflation, but the precise mechanism is not of central significance here (for further discussion see Sawyer, 1997). The focus of this paper is on the role of aggregate demand on the determination of the level of employment within the general context of some of NAIRU (by which we mean an equilibrium level of unemployment consistent where the forces determining that equilibrium arise from price and wage determination). Two aspects of the relationship between the level of aggregate demand and the NAIRU are particular significance. First, it is argued that the real wage - employment relationship based on enterprise decisions (which many mistakenly refer to as the demand for labor schedule) cannot be fully articulated without reference to the level of aggregate demand. Second, and more significantly for this paper, a model is derived in which investment through additions to the capital stock shifts that real wage - employment relationship, and with a sufficiently expansionary environment investment can shift that relationship until the NAIRU is compatible with full employment. A number of limitations on this conclusion are discussed.

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Paper provided by EconWPA in its series Macroeconomics with number 9712012.

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Length: 23 pages
Date of creation: 24 Dec 1997
Date of revision:
Handle: RePEc:wpa:wuwpma:9712012
Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on PostScript; pages: 23; figures: included/request from author/draw your own
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