The NAIRU Concept - Measurement uncertainties, hysteresis and economic policy role

Abstract

The present paper looks at the notion of a NAIRU and asks whether it continues to stand up to rigorous analysis in terms of both its theoretical underpinnings or of its empirical applicability. The paper addresses the essential questions in relation to an examination of the NAIRU, namely: firstly can it be reliably calculated ? and secondly, does the concept continue to have any relevance in terms of the micro and macro policy debate ? In relation to the first question, it is stressed that precise measurements of the NAIRU are extremely difficult to produce because any measurement process is dogged by the existence of a number of fundamental sources of uncertainty. As regards the second question, the growing unease, openly articulated in the vast literature on this topic, concerning both the theoretical and empirical underpinnings of the NAIRU, suggests caution needs to be exercised in terms of any policy role being attributed to the concept. The paper tentatively concludes that while theoretically the NAIRU is still a useful concept, its extensive empirical inadequacies render it less than useful in the macro policy context, although a case can still be made for sustaining its use as a structural indicator for cross country, labour flexibility, comparisons.nairu, non-accelerating inflation rate of unemployment