Dear users, today we have a very personal request. We have decided to offer our learning materials free of charge because we believe in an open, pluralist economic science that is available to everyone, worldwide. We do this without advertising because we want to remain independent of commercial interests. But our commitment to independence and open access also has its price. Every year we have large costs for programming, staff and to support our authors. If everyone reading this gave a small amount, we could keep Exploring Economics thriving for years to come - but 99% of our users don't give. So today we ask you to protect Exploring Economics's independence. The heart and soul of Exploring Economics is a community of people working to bring you unlimited access to high-qualitiy, economic learning and teaching material. Please take just a few moments to help us keep Exploring Economics going. Thank you!
We are a registered non-profit organization | Bank account: Netzwerk Plurale Ökonomik e.V., IBAN: DE91 4306 0967 6037 9737 00, SWIFT-BIC: GENODEM1GLS | Imprint
Time to Ditch the NAIRU
American Economic Association, 1997
Exploring Economics Working Paper Selection
We collect and republish selected Working Papers and Journal Articles on Exploring Economics.
Time to Ditch the NAIRU
Abstract: The concept of a natural rate of unemployment, or nonaccelerating inflation rate of unemployment (NAIRU), remains controversial after twenty-five years. This essay presents a brief for no-confidence, in four parts. First, the theoretical case for the natural rate is not compelling. Second, the evidence for a vertical Phillips curve and the associated accelerationist hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak. Third, economists have failed to reach professional consensus on estimating the NAIRU. Fourth, adherence to the concept as a guide to policy has major social costs but negligible benefits.
Subscribe to our newsletter to learn about new debates, conferences and writing workshops.
Comment from our editors:
Is there something even akin to a 'natural rate of unemployment', the infamous term coined by Milton Friedman? And, more to the point, is the theoretical construct of a labour 'market' even scientifically sound?
In this masterly refutation of one of modern central bankers' (and, indeed, macroeconomic mainstream's) central tenets, the non-accelerating inflation rate of unemployment or "NAIRU", James Galbraith demonstrates that since there is no such thing as a labour market in the sense of other markets for goods and services, the concept of a persisting relationship between unemployment and inflation is a fallacy. But as long as rate setters and politicians believe in this Phillips Curve-inspired thought, employment will be sacrificed time and again to ward off an imaginary lift-off in inflation, effecting huge economic and social cost to no avail. In his train of argument, Galbraith is relentlessly Post-Keynesian, stipulating that aggregate demand determines the rate of employment, while nominal wages are subject to exogenous factors such as the relative bargaining power of trade unions and employers, leaving no place for a deterministic relationship between unemployment and inflation.
This material has been suggested and edited by:
This project is brought to you by the Network for Pluralist Economics (Netzwerk Plurale Ökonomik e.V.). It is committed to diversity and independence and is dependent on donations from people like you. Regular or one-off donations would be greatly appreciated.