NAIRU Research Articles

The NAIRU reconsidered: why labour market deregulation may raise unemployment

According to the mainstream theory of equilibrium unemployment, persistent unemployment is caused mainly by ‘excessive’ labour market regulation, whereas aggregate demand, capital accumulation and technological progress have no lasting effect on unemployment. We show that the mainstream non‐accelerating inflation rate of unemployment (NAIRU) model is a special case of a general model of equilibrium unemployment, in which aggregate demand, investment and endogenous technological progress do have long‐term effects. It follows that labour market deregulation does not necessarily reduce steady‐inflation unemployment. Theoretically, if the decline in real wage growth claims owing to deregulation is smaller than the ensuing decline in labour productivity growth and in the warranted real wage growth, then in that case steady‐inflation unemployment may increase. Empirical evidence for 20 Organisation for Economic Cooperation and Development (OECD) countries (1984–1997) indicates that the impact of labour market deregulation on OECD unemployment is zero, and possibly negative (causing a higher rate of unemployment).

IS THE NAIRU THEORY A MONETARIST, NEW KEYNESIAN, POST KEYNESIAN OR A MARXIST THEORY?

ABSTRACTThe NAIRU (non‐accelerating inflation rate of unemployment) theory has become the mainstream theory in explaining unemployment in Europe and is often used to justify demands for a cutback of the welfare state, such as reducing unemployment benefits. Close inspection reveals that it, perhaps surprisingly, shares some arguments with Post Keynesian and even Marxist theory. The paper proposes an underdetermined, encompassing NAIRU model, which is consistent with several theoretical traditions. Depending on the closure with respect to demand formation and determination of the NAIRU itself, the model allows for New Keynesian, Post Keynesian and Marxist results.

Aggregate Demand, Conflict, and Capacity in the Inflationary Process

The dominant view relating to unemployment and inflation is that inflation will be constant at a level of unemployment (the nonaccelerating inflation rate of unemployment, NAIRU) determined on the supply side of the economy (and in the labor market in particular). Further, the economy will tend to converge to (or oscillate around) that level of unemployment. Moreover, demand variables or economic policy changes are thought to have no influence whatsoever on NAIRU. An alternative perspective on inflation would indicate that there would be no automatic forces leading to a level of aggregate demand consistent with constant inflation. Inflationary pressures would arise from, inter alia, a role of conflict over income shares, and from cost elements, with the price of raw materials, especially oil, being the most important. Insofar as there are supply-side factors impinging on the inflationary process, these would arise from the level of productive capacity (relative to aggregate demand) and from conflict over income shares. This paper focuses on the arguments and the evidence that supply-side constraints should be viewed as arising from capacity constraints, rather than from the operation of the labor market.

Can Productivity Growth Explain the NAIRU? Long‐Run Evidence from Britain, 1871–1999

This paper investigates the effect of productivity growth on the non‐accelerating inflation rate of unemployment (NAIRU) over the long run, using historically consistent time series for the UK from 1871 to 1999. A two‐equation model of unemployment and wage‐setting that incorporates productivity effects is estimated over the whole period, allowing for shifts associated with changes in labour market institutions. The results indicate that faster productivity growth reduces the NAIRU, but that this goes only part of the way towards explaining wide swings in average unemployment across the decades.

Nonlinearities and Fractional Integration in the US Unemployment Rate*

AbstractThis paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach introduces fractional integration and nonlinearities simultaneously into the same framework, using a Lagrange multiplier procedure with a standard null‐limit distribution. The empirical results suggest that the US unemployment rate can be specified in terms of a fractionally integrated process, which interacts with some nonlinear functions of labour‐demand variables such as real oil prices and real interest rates. We also find evidence of a long‐memory component. Our results are consistent with a hysteresis model with path dependency rather than a non‐accelerating inflation rate of unemployment (NAIRU) model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilization policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy‐making.

Providing Intuition to the Fieller Method with Two Geometric Representations using STATA and EVIEWS

The Fieller Method for the construction of confidence intervals for ratios of the expected value of two normally distributed random variables has been shown by a number of authors to be a superior method to the delta approximation. However, it is not widely used due in part, to the tendency to present the intervals only in a formula context. In addition, potential users have been deterred by the potential difficulty in interpreting non-finite confidence intervals when the confidence level is less than 100%. In this paper we present two graphical methods which can be easily constructed using two widely used statistical software packages (Eviews and Stata) for the representation of the Fieller intervals. An application is presented to assess the results of a model of the non-accelerating inflation rate of unemployment (NAIRU).

Wage Bargaining and Monetary Policy in a Kaleckian Monetary Distribution and Growth Model: Trying to Make Sense of the NAIRU

In a Kaleckian monetary distribution and growth model with conflict inflation we assess the role of a Non-Accelerating Inflation Rate of Unemployment (NAIRU). The short-run stability of a NAIRU is examined taking into account real debt effects of accelerating and decelerating inflation, and the short-run effectiveness of monetary policy interventions applying the interest rate tool is analysed. The problem of long-run endogeneity of the NAIRU is addressed integrating the long-run distribution effects of monetary policies' real interest rate variations into the model. It is concluded that monetary policy interventions in order to stabilise inflation are either unnecessary or costly in terms of employment in the short run. In the long run, these policies bear the risk of continuously increasing the NAIRU in order to keep inflation under control, which yields a horizontal long-run Phillips curve and latent stagflation. Instead of relying on monetary policies, the cause of inflation should be directly addressed and wage bargaining co-ordination should be applied as an appropriate tool.

Is the NAIRU more useful in forecasting inflation than the natural rate of unemployment?

Recent studies have indicated that the terms ‘NAIRU’ (non-accelerating inflation rate of unemployment) and ‘natural rate of unemployment’ are not interchangeable. While NAIRU is an empirical macroeconomic relationship estimated via a Phillips curve, the natural rate is an equilibrium condition in the labour market, reflecting the market's microeconomic features. This study evaluates comparatively the inflation-forecasting power of alternative time-varying estimates of the natural rate of unemployment relative to the NAIRU. The natural rate of unemployment in the USA since the Second World War is estimated. Three alternative methods are utilized: the Kalman filter, a structural determinants approach, and the Hodrick-Prescott filter. The section that follows assesses how each estimator of the natural rate compares with the others – as well as with the NAIRU derived from a Phillips curve – in forecasting inflationary changes in the USA in the second half of the twentieth century. The analysis reveals that the overall inflation-forecasting utility of the natural rate of unemployment relative to the NAIRU is not very different. Moreover, the conclusion appears to be quite robust to various estimators of the natural rate.

Capital Stock and Unemployment: Searching for the Missing Link

The purpose of this paper is to examine the proposition that capital stock relative to aggregate output has been an important variable in the determination of the U.S. NAIRU (Non-Accelerating Inflation Rate of Unemployment) over the last four decades. We present new empirical evidence, obtained from the application of the cointegrated VAR methodology to U.S. time-series data, that lends strong support to the claim that the aggregate capital-output ratio, the real price of imports, and aggregate capacity utilization were determinants of the NAIRU in the period considered. The same evidence also shows that technical progress and changes in long-term unemployment did not affect the NAIRU. We believe this evidence suggests that, insofar as the aggregate capital-output ratio is affected by changes in real interest rates, the stance of monetary policy is one determinant of the NAIRU.

The Unemployment Effects of Proposed Changes in Social Security's “Normal Retirement Age”

This paper identifies and analyzes an inherent conflict between some proposed U. S. Social Security reform measures, which would encourage delayed retirement decisions, and the objective of minimizing the economy's unemployment rate. Using recent demographic trends in the age composition of the U.S. labor force, the study suggests that such proposed U.S. Social Security reform measures may actually increase the economy's unemployment rate. It concludes that measures to encourage older workers would relieve labor market pressures (while also helping the Social Security system) if and only if unemployment was persistently near the non-accelerating inflation rate of unemployment (NAIRU). However, in an economy with above NAIRU unemployment, which has been the case most often in recent years, the opposite Social Security policy logic would apply.

Labour Market Trends and Outlook

Given New Zealand's recent robust economic performance, 3.6% per annum on average since 1999, the strong improvement in a wide array of la hour market indicators has not been surprising. What has surprised many economic commentators has been the continued strength of the labour market in the face of the recent slowing economic activity.The ability of the economy to make use of its labour capacity may have improved suggesting a fall in New Zealand's non-accelerating inflation rate of unemployment (NAIRU).With labour utilisation now stretched to the limit if we want to maintain economic growth at levels we have become accustomed to, we will need to substantially lift the level of labour productivity growth in the coming years. However making the transition to a more productive economy while maintaining the gains we have achieved in labour utilisation will not be an easy task.

Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the US and the UK*

AbstractDuring the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a change in the relationship between inflation and unemployment for the US and UK using Phillips curve models. The impact of including explicit inflation expectations is also considered. Inflation expectations are found to play an important role, particularly in the US. When expectations are included there is still evidence that the non‐accelerating inflation rate of unemployment (NAIRU) steadily declined during the late 1990s, although this decline in the US NAIRU is not found solely in the 1990s.

Aggregate demand, conflict and capacity in the inflationary process

This paper focuses on an alternative perspective on inflation to that of the non-accelerating inflation rate of unemployment (NAIRU). It indicates that there are no automatic forces leading to a level of aggregate demand consistent with constant inflation. Inflationary pressures arise from conflict over income shares, and from cost elements, with the price of raw materials, especially oil, being the most important. There are supply-side factors impinging on the inflationary process, which arise from the level of productive capacity (relative to aggregate demand). The supply-side constraints are viewed as arising from capacity constraints, rather than from the operation of the labour market. Copyright 2005, Oxford University Press.

Not Yet Dead at the Fed: Unions, Worker Bargaining, and Economy‐wide Wage Determination

Transcripts of the Federal Open Market Committee (FOMC) of the Federal Reserve and related documents provide new insights into how macro‐policy makers characterized the labor market. Over the period of the 1980s and the 1990s, the Federal Reserve seemingly overemphasized the significance of union settlements, characterizing them in wage‐push terms out of proportion to declining union density. Fed policy makers expressed surprise that the nonaccelerating inflation rate of unemployment (NAIRU) dropped during this period and offered various ad hoc explanations to explain the drop. The underlying common element of these explanations is that they were based on a rhetorical bargaining framework, explicit or implicit, that workers bargain as active agents for wages. Along with ongoing direct discussion of union settlements, this tendency suggests a view of worker bargaining power that seems at variance with union decline and the reality of an increasingly nonunion labor market. While worker bargaining models can be reconciled in a formal sense with various theories of nonunion wage determination, the ability of such models to realistically explain the macro outcomes that puzzled and challenged policy makers can be questioned.

Empirical Estimates of the NAIRU

Abstract. Empirical studies have found that the non-accelerating inflation rate of unemployment (NAIRU) has been fluctuating in OECD countries around a constant mean of several percentage points over the past decades. This mean is calculated from the constant terms carried over from the wage and price growth equations. In this paper it is shown that a high proportion of the constant term is a statistical artefact and suggests a new method which yields approximately unbiased estimates of the time-invariant NAIRU. Using data for OECD countries it is shown that the constant-term correction lowers the unadjusted time-invariant NAIRU by approximately half.

Unemployment dynamics and NAIRU estimates for accession countries: A univariate approach

In this paper we test for hysteresis effects versus the natural rate hypothesis on unemployment rates of new members in the European Union (EU) using unit root tests that account for the presence of level shifts. In addition, we estimate the non-accelerating inflation rate of unemployment (NAIRU) from a univariate perspective. The precision of these NAIRU are investigated by studying two sources of inaccuracy that derive from the estimation of the break points, and the estimation of the autoregressive parameters. The results indicate up to four structural breaks in the NAIRU of transition countries that can be associated with institutional changes from implementing market-oriented reforms. Moreover, the degree of persistence in unemployment varies dramatically among the individual countries depending on the stage reached in the transition process and the institutional setting in the labor market. Journal of Comparative Economics 33 (3) (2005) 584–603.

Full employment and ecological sustainability: comparing the NAIRU, Basic Income, and Job Guarantee approaches

One of the central themes of this joint conference – A Future that Works: Economics, Employment, and the Environment – is how to achieve full employment and ecological sustainability. This paper assesses three alternative macroeconomic policy approaches in terms of how well they resolve these two policy objectives. The three approaches assessed are: the NAIRU (non-accelerating inflation rate of unemployment) approach to macroeconomic policy setting; the Basic Income approach (guaranteed income for all); the Job Guarantee approach (employer of last resort). It is argued that: the NAIRU approach fails on both fronts; the Basic Income approach has the potential to improve distributional equity – though not as effectively as the Job Guarantee – but does not ensure full employment or ecological sustainability; the Job Guarantee is the best means of achieving full employment but, in order to bring about ecological sustainability, needs to be supplemented by the imposition of natural resource throughput constraints.

Potential Output in the Czech Republic: A Production Function Approach

This paper deals with the Czech economy supply side performance from the macroeconomic point of view. In order to evaluate the supply side behaviour we calculate the potential output dynamic path and contribution of its particular determinants using the production function method. The results show that the potential output growth was rather slow around 2 per cent. This implies that e. g. even 3 per cent growth can cause macroeconomic imbalances. Increase of the non-accelerating-inflation-rate of unemployment (NAIRU), weak growth of the capital stock and weak growth of total factor productivity appear to be the reasons for the constrained ability of the Czech economy to grow steadily and converge to EU level.

Do Minimum Wages Raise the NAIRU?

Maybe a lot. The ratio of the minimum wage to the average wage enters a Phillips-curve equation with a coefficient that is highly significant, stable, and robust. One interpretation of these results is that the relative level of the minimum wage affects the Non-Accelerating Inflation Rate of Unemployment or NAIRU. My estimates are consistent with the reduction in the relative level of the minimum wage since 1980 lowering the U.S. NAIRU about 1½ percentage points, while raising the NAIRU in continental Europe. However, other interpretations are also possible.

A Multivariate Filter for Measuring Potential Output and the NAIRU: Application to the Czech Republic

This paper presents a multivariate (MV) methodology for obtaining measures of excess demand that can facilitate discussion of monetary policy issues and improve policy decisions. Using data for the Czech Republic, a growing economy undergoing major structural change, it shows how the use of more information to condition the paths of potential output and the non accelerating inflation rate of unemployment (NAIRU) improves on univariate methods as the Hodrick-Prescott (HP) filter.