Unemployment rate not accelerating inflation

The unemployment rate not accelerating inflation (in English: Non-Accelerating Inflation Misses Unemployment off or NAIRU ) is an estimate, for a country and at a given moment, rate of minimum Chômage which can be accompanied by a stable Inflation. The term was invented by James Tobin, on the basis of research undertaken by Franco Modigliani and Lucas Papademos. The NAIRU is usually used by many countries of OECD within the framework of their Monetary policy.

Description

The concept was invented in 1975 under the name of NIRU ( non-inflationary spleen off unemployment , noninflationary unemployment rate) by the economists Franco Modigliani and Lucas Papademos, in order to provide a theoretical base to the empirical observations summarized by the Courbe from Philips. In this model, inflation comes from an excessive request total, coming from a Job market tended, which pushes the Salaire S with the rise, and obliges the Entreprise S to increase their prices in order to cover these rises. The NAIRU is the threshold of the unemployment rate which causes this tension; when unemployment rate is durably higher than the NAIRU, inflation tends to decrease. In 1980, James Tobin underlines the divergent nature of the evolution of inflation below this threshold, and proposes formulation NAIRU to give an account of it.

The NAIRU constitutes an answer keynésienne to the concept monetarist of natural Chômage introduces by Milton Friedman. Indeed, for the monetarists, the curve of long-term Philips is vertical: the total request does not influence unemployment, and there exists a natural unemployment rate (U^* on the figure) towards which tightens the economy. This rate is independent of the rate of inflation, and all Monetary policy is futile: it acts only on inflation without modifying unemployment. Modigliani and Papademos réinterprêtent natural unemployment rate like a threshold:

• if unemployment rate U is lower than natural unemployment rate U^*, inflation tends to increase;
• if it is higher, it tends to decrease;
• if it is close, it remains constant.

Calculation

In its simplest form, the relation inflation-unemployment is expressed as follows:

$\backslash \; pi\; -\; \backslash \; pi\_\; \{-\; 1\}\; =\; has\; (U\; -\; U^*)\; \backslash ,$

where $\backslash \; pi$ is inflation for the current period, $\backslash \; pi\_\; \{-\; 1\}$ is inflation for the previous period, has is a negative constant.

By observing inflation and unemployment rate over the period three 0,1,2, one obtains:

$\backslash \; pi\_2\; -\; \backslash \; pi\_1\; =\; has\; (U\_2\; -\; U^*)\; \backslash ,$

$\backslash \; pi\_1\; -\; \backslash \; pi\_0\; =\; has\; (U\_1\; -\; U^*)\; \backslash ,$

what gives then:

$U^*\; =\; \backslash \; frac\; \{(\backslash \; pi\_1-\; \backslash \; pi\_0)\; U\_2\; -\; (\backslash \; pi\_2-\; \backslash \; pi\_1)\; U\_1\}\; \{2\; \backslash \; pi\_1\; -\; (\backslash \; pi\_2\; +\; \backslash \; pi\_0)\}$

In practice, short-term measurements are distorted by many other factors, and one uses filters such as the Filtre of Hodrick-Prescott to attenuate these factors of “noise”. One thus obtains an estimate of U^*, which is a slipping Moyenne.

Implications

It is then always possible to set up a monetary policy “to control” the compromise short-term inflation-unemployment, which validates the approach keynésienne of the monetary policy, and the NAIRU indicates the practical limits of such a policy. Thus, any attempt to make fall unemployment rate under this threshold by a simple policy of the economic situation would be vain and would manage, in the medium term, to only make increase the rate of inflation. The Anglo-Saxon economists use sometimes the expression “to push on a string” (" pushing one has string ") to describe such a situation. The NAIRU does not mean that it is structurally impossible to make pass unemployment in lower part of this rate; it does nothing but indicate a priori the effectiveness (or the uselessness) of the only revivals of the economic situation, and thus underlines the need for structural economic reforms when it is high.

Although the terms NAIRU and “natural unemployment rate” represent opposite analyzes of the job market, they are sometimes used as synonyms, even in the economic literature.

Estimates of the NAIRU For some countries

OECD and the the IMF regularly publish estimates of the NAIRU for the majority of the developed countries. Source: OCDE

For the France in 1999, OECD estimated the NAIRU at approximately 9,5%. It is not a question of a recommendation, but of an estimate: thus, that does not mean that OECD advised in France to maintain unemployment with at least 9,5% under penalty of creating inflation because of a rise of the Salaire S, but simply that according to OECD, the socio-economic structure of France inevitably implied a strong unemployment.

Criticisms

The NAIRU was criticized as of its first publication, initially by the monetarists who regard it as a misconception on the concept of natural unemployment. Its theoretical base is fragile, and as it is not observable directly (with the difference in unemployment rate) its estimate is prone to guarantee. The rise, unexplained a priori , of the NAIRU in the years 1980 in Europe led to more complex models of the job market, of which models with Hystérèse of Olivier Blanchard.

Others critical come from its normative application: by proposing an arbitration between inflation and unemployment, it is used as guarantee with the governments which made fight against inflation their priority revealed; those can let believe that it is impossible for them to combat unemployment without letting spin inflation.

The systematically anti-inflationary monetary policies of the European central large banks, and the ECB since 1999, thus were denounced by Franco Modigliani itself: “Unemployment is mainly the result of erroneous macroeconomic policies inspired by an obsessional fear of inflation and an attitude regarding unemployment as negligible quantity. ”

Joseph Stiglitz, in his book When capitalism loses the head , in which it reviews the failures and the successes of the administration Clinton, to which it took part, affirms the exceeded character of the use of the NAIRU. According to him, it is clear that this index is not relevant any more to determine the bond between unemployment and inflation, and that the faith in this bond causes to prevent the governments from implementing policies directed towards employment. Indeed, the Central Bank of a country being independent of the government, and one of their mission - if it is not the principal one, as it is the case for the Federal fund of the United States (EDF) - being to take care of the price stability, all Budget policy expansionist implementation by a government will be countered by a Monetary policy restrictive by increasing interest rates and thus the cost of the loan.

Many political movements, whose Altermondialiste S, support that the NAIRU would be a means of making pressure on the wages. The maintenance of a permanent unemployment rate would thus cause to limit, to see to decrease the salary demands. This idea of a permanent unemployment as average of coercion of the workers is old and quite former to the ideology which the NAIRU underlies.

See too

• Law of Okun

• Difference between the NAIRU and natural unemployment rate
• Wages in reserve

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