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# What is the Nairu concept?

## What is the Nairu concept?

The non-accelerating inflation rate of unemployment (NAIRU) is the specific level of unemployment that is evident in an economy that does not cause inflation to increase.

### What is NAIRU in Australia?

The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is a variable of interest to policy makers as it provides an estimate of the degree of labour market slack in the economy. Australia’s NAIRU was previously thought to be around 5 per cent.

#### What causes NAIRU to change?

The level of the NAIRU itself is assumed to fluctuate over time as the relationship between unemployment level and pressure on wage levels is affected by productivity, demographics and public policies In Australia, for example, the NAIRU is estimated to have fallen from around 6% in the late 1990s to closer to 4% …

How can we reduce NAIRU?

To reduce the natural rate of unemployment, we need to implement supply-side policies, such as:

1. Better education and training to reduce occupational immobilities.
2. Making it easier for workers and firms to relocated, e.g. more flexible housing market and greater supply in areas of high job demand.

How is NAIRU calculated?

The Non-Accelerating-Inflation Rate of Unemployment (NAIRU) is a measure of much unemployment would change in a given year independent of inflation. Subtract the slope of the Phillips curve from the unemployment rate of the year you are trying to calculate the NAIRU for. The resulting number is the NAIRU.

## Is NAIRU the same as Lrpc?

Although a highly theoretical concept it has been influential in shaping monetary policy. NAIRU is shown graphically as the level of unemployment at the prevailing long run Phillips curve (LRPC).

### How do you find NAIRU?

The curve you find is known as the Phillips curve. Find the slope of the Phillips curve. Subtract the slope of the Phillips curve from the unemployment rate of the year you are trying to calculate the NAIRU for. The resulting number is the NAIRU.

#### Why is NAIRU important?

The Nairu is supposed to capture the sweet spot – the lowest level to which the unemployment rate can safely fall before inflation starts to accelerate. The Nairu is a natural fit with the Fed’s statutory objectives for the conduct of monetary policy.

What causes NRU to change?

The NRU can change due to changes in structural and frictional unemployment. For example, a firm may want to hire fewer workers because the skills of those workers are not needed as much as they used to be. That will cause more structural unemployment, and the natural rate of unemployment will increase.

What is the current NAIRU rate?

5.0 per cent
The current estimate of the NAIRU is 5.0 per cent of the labour force, with a 70 per cent confidence interval of plus or minus 1 percentage point.

## What is a deflationary gap?

: a deficit in total disposable income relative to the current value of goods produced that is sufficient to cause a decline in prices and a lowering of production — compare inflationary gap.