Non-accelerating inflation rate of unemployment (NAIRU) is a theoretical level of unemployment below which inflation would be expected to rise. It was first introduced as NIRU (non-inflationary rate of unemployment) by Franco Modigliani and Lucas Papademos in 1975, as an improvement over the "natural rate of unemployment" concept, which was proposed earlier by Milton Friedman.
In the United States, estimates of NAIRU typically range between 5 and 6%. Monetary policy conducted under the assumption of a NAIRU typically involves allowing just enough unemployment in the economy to prevent inflation rising above a given target figure. Prices are allowed to increase gradually and some unemployment is tolerated.
An early form of NAIRU is found in the work of Abba P. Lerner , who referred to it as "low full employment" attained via the expansion of aggregate demand, in contrast with the "high full employment" which adds incomes policies (wage and price controls) to demand stimulation. Friedrich von Hayek argued that governments attempting to achieve full employment would accelerate inflation where unemployment results from a misalignment between the distribution of labour and the distribution of demand.
The concept arose in the wake of the popularity of the Phillips curve which summarized the observed negative correlation between the rate of unemployment and the rate of inflation (measured as annual nominal wage growth of employees) for a number of industrialised countries with more or less mixed economies. This correlation (previously seen for the U.S. by Irving Fisher) persuaded some analysts that it was impossible for governments simultaneously to target both arbitrarily low unemployment and price stability, and that, therefore, it was government's role to seek a point on the trade-off between unemployment and inflation which matched a domestic social consensus.
During the 1970s in the United States and several other industrialized countries, Phillips curve analysis became less popular, because inflation rose at the same time that unemployment rose (see stagflation).
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Frictional unemployment is a form of unemployment reflecting the gap between someone voluntarily leaving a job and finding another. As such, it is sometimes called search unemployment, though it also includes gaps in employment when transferring from one job to another. Frictional unemployment is one of the three broad categories of unemployment, the others being structural unemployment and cyclical unemployment.
The natural rate of unemployment is the name that was given to a key concept in the study of economic activity. Milton Friedman and Edmund Phelps, tackling this 'human' problem in the 1960s, both received the Nobel Memorial Prize in Economic Sciences for their work, and the development of the concept is cited as a main motivation behind the prize. A simplistic summary of the concept is: 'The natural rate of unemployment, when an economy is in a steady state of "full employment", is the proportion of the workforce who are unemployed'.
Path dependence is a concept in the social sciences, referring to processes where past events or decisions constrain later events or decisions. It can be used to refer to outcomes at a single point in time or to long-run equilibria of a process. Path dependence has been used to describe institutions, technical standards, patterns of economic or social development, organizational behavior, and more. In common usage, the phrase can imply two types of claims.
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