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The NAIRU: A Critical Appraisal

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  • Malcolm Sawyer

    (The Jerome Levy Economics Institute)

Abstract

This paper is concerned with the question of the relevance of the NAIRU for policy formulation. However, that question leads to the following consideration. The estimates for the NAIRU are based on the econometric estimation of models of the economy. Particular models are used and particular interpretations are placed on the relationship between the variables which the model involves. Since the NAIRU can never be directly observed, resort has to be made to the econometric estimation of wage and price equations from which an equilibrium solution for unemployment is derived and labeled the NAIRU. It is therefore important to know how valid those models are and the estimates derived from those models. Whilst some have pointed to the unreliability of those estimates (e.g. Setterfield et alia, 1992) and others to the degree of uncertainty surrounding the estimates (e.g. Madsen, 1997), others have put a great deal of faith in specific estimates: for example the ‘Tightness in the labor market is measured by the excess of CBO's estimate of the non accelerating inflation rate of unemployment (NAIRU) over the actual unemployment rate. It is an indicator of future wage inflation' (Congressional Budget Office, 1994, p. 4), and that Office uses an estimate of 6 percent for the NAIRU. One expression of the belief in the NAIRU is given by Stiglitz when he writes that ‘I have become convinced that the NAIRU is a useful analytic concept. It is useful as a theory to understand the causes of inflation. It is useful as an empirical basis for predicting changes in the inflation rate. And it is useful as a general guideline for thinking about macroeconomic policy' (Stiglitz, 1997, p. 3). The focus pf this paper is not on the reliability or otherwise of estimates of the NAIRU, but rather to evaluate the theoretical foundation of the models from which the NAIRU has been derived. For if those models are on some relevant criteria judged to be unsound, then estimates and policy conclusion derived are seemly unsound.

Suggested Citation

  • Malcolm Sawyer, 1997. "The NAIRU: A Critical Appraisal," Macroeconomics 9712013, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:9712013
    Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on PostScript; pages: 38; figures: included
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    References listed on IDEAS

    as
    1. Malcolm C. Sawyer, 1992. "On Imperfect Competition and Macroeconomic Analysis," Palgrave Macmillan Books, in: Alfredo Monte (ed.), Recent Developments in the Theory of Industrial Organization, chapter 4, pages 79-113, Palgrave Macmillan.
    2. repec:sae:niesru:v:111:y::i:1:p:62-85 is not listed on IDEAS
    3. Layard, R. & Nickell, S., 1985. "The Causes of British Unemployment," National Institute Economic Review, National Institute of Economic and Social Research, vol. 111, pages 62-85, February.
    4. Sawyer, Malcolm C, 1982. "Collective Bargaining, Oligopoly and Macro-Economics," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 428-448, November.
    5. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    6. Cross,Rod Preface by-Name:Blanchard,Olivier (ed.), 1995. "The Natural Rate of Unemployment," Cambridge Books, Cambridge University Press, number 9780521483308, January.
    7. Malcolm C. Sawyer, 1983. "Business Pricing and Inflation," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-03166-5, July.
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    Cited by:

    1. Rudy Fichtenbaum, 2003. "Is there a natural level of capacity utilization?," Forum for Social Economics, Springer;The Association for Social Economics, vol. 33(1), pages 45-62, September.
    2. Malcolm Sawyer, 1997. "Aggregate Demand, Investment and the NAIRU," Macroeconomics 9712012, University Library of Munich, Germany.

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