The NAIRU and Wages in Local Labor Markets

Abstract

Unemployment in the United States has been below its presumed NAIRU ( nonaccelerating-inflation rate of unemployment) of 6 percent for more than four years. The doctrine or dogma of the NAIRU led to the expectation that an unemployment rate below the NAIRU would make accelerating inflation inevitable; but by all measures inflation has, if anything, declined and shows no signs of increasing. The NAIRU doctrine has had a major role in macroeconomic theory and monetary policy for several decades. For example, the seven hikes in interest rates by the Fed in 1994–1995 seem to have been motivated not by concerns about existing inflation (CPI-U inflation was steady and below 3 percent) , but by fears that an unemployment rate falling toward the 6-percent level, and then below 6 percent in September 1994, would foster future inflation. Theoretical and statistical criticisms of the NAIRU have been growing (see e.g., Robert Solow, 1986; James Tobin, 1993; Eisner, 1994; Rod Cross, 1995 [ essays by Cross, Frank Hahn and Tobin ] ; Ray Fair, 1996; Olivier Blanchard and Lawrence Katz, 1997;