NAIRU
Also called: Non-accelerating inflation rate of unemployment · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT
Meaning
NAIRU stands for the non-accelerating inflation rate of unemployment. It is the lowest unemployment rate an economy can sustain without inflation speeding up. If policy pushes unemployment below this level, inflation rises year after year. It matters because it marks a limit on how far policy can push unemployment down using extra demand.
Example
Suppose a government keeps boosting demand to push unemployment below the NAIRU. Workers keep bargaining for higher wages and firms keep raising prices, so inflation goes up every year instead of settling at one level. In India, the Phillips curve fits the data only weakly and unemployment data are poor, because most workers are informal. So the RBI relies on the output gap (actual output minus potential output) as its gauge of demand pressure instead.
Don't confuse with
- Full employment (zero unemployment): the NAIRU is not zero. Some unemployment always remains, even when inflation is stable.