Natural Rate of Unemployment and NAIRU (1 Viewer)

[charlie_charlie]

Hey ppl, I was wondering if you could help clarify the difference/meanings of the natural rate of unemployment and the NAIRU. I know that natural rate is when the supply and demand for employment intersect at a given wage, but how does the NAIRU tie in? Isn't the NAIRU the lowest rate that can be sustained before inflation begins to kick in...So why does my leading edge textbook say, (on p 149) that "is why the natural rate of unemployment is sometimes referred to as the NAIRU"...I'm just really confused about their relationship with one another. Or are they just two seperate graph thingys.
I went over this in class today. and i understood then...but now i am confused again.

 

[Sarah168]

hmm i remember that the riley book ( dunno about dixon..cant remember! ) said that "another term for natural rate..blah blah is NAIRU"....i can check up on this...

 

[George W. Bush]

Google is your friend.

NAIRU
The non-accelerating-inflation rate of unemployment (see NATURAL RATE OF UNEMPLOYMENT).

NATURAL RATE OF UNEMPLOYMENT
A controversial phrase, which actually means little more than the lowest rate of UNEMPLOYMENT at which the jobs market can be in stable EQUILIBRIUM. Keynesians, encouraged by the PHILLIPS CURVE, assumed that a GOVERNMENT could lower the rate of unemployment if it was willing to accept a little more INFLATION. However, economists such as MILTON FRIEDMAN argued that this supposed inflation-for-jobs trade-off was in fact a trap. Governments that tolerated higher inflation in the hope of lowering unemployment would find that joblessness dipped only briefly before returning to its previous level, while inflation would rise and stay high. Instead, they argued, unemployment has an equilibrium or natural rate, determined not by the amount of DEMAND in an economy but by the structure of the LABOUR market. This is the lowest level of unemployment at which inflation will remain stable. When unemployment is above the natural rate demand can potentially be increased to bring it to the natural rate, but attempting to lower it even further will only cause inflation to accelerate. Hence the natural rate is also known as the non-accelerating-inflation rate of unemployment, or NAIRU.

 

[charlie_charlie]

hmmm...i think i understand now
Thanks Mr Bush!

 

[i-color]

yeah natural rate of unemployment just means NAIRU, which just means when cyclical unemployment is zero. The NAIRU basically means structural unemployment only....

 

[aditya]

yeh they mean the same thing but the the NAIRU was developed by the demand siders... (keynesian) side of economists. The NRU is really a supply-side theory...

so they do mean the same things... an di thought the Leading edge book exaplined it heaps mad... i searched everywherE! i have like a book of notes on unemployment now, but i thought it explained it very sweetly...

can someone "approve" this for me?

The natural rate of employment is the rate of unemployment which is at equilibrium(E) with supply and demand. This is the target, but it doesn't mean that there sitll won't be unemployment in the economy. regardless of this E level, there will sitll be unemployment- Hardcore, Structural and Hidden.

The only way to lower NAIRU or long-term (NRU) these unemployed workers will need to be re-trained and a more efficient job matching service to be put it into place (lets get picky, hehe).

 

[George W. Bush]

I think a better explanation of what the NAIRU is would improve that answer.

 

[aditya]

oh ofcourse, i totaly ignored it... could u explain it to me? non accelerating inflation rate of unemployment... so... is this good

at this rate of unemployment, the rate of unemployment will simply return to this level but with a higher rate of inflation.

i dun get it... explain?

 

[George W. Bush]

basically NAIRU is where there is no cyclical unemployment but all unemployment is structual as i understand things
you hinted that you understood the concept but to be sure the markers knows that you know you should just come out and say what it is

 

[charlie_charlie]

okay so why do my notes say:
If the natural rate is ABOVE the Nairum there are still a lot of workers and so would cause deflationary pressures as wages are lowed...
And they also say: THe natural rate has both skilled and non skilled wporkers and if the natural rate is below the NAIRU an there are no more skilled workers in the unemployed 'pool' of ppl and firms will push up wages, causing inflation

 

[charlie_charlie]

or am i just confusing myself here for no reason? from what u r saying, the NAIRU and natural rate is basically the same thing? correct....?

 

[aditya]

lol mate...

im hoping u made up those notes, because if u didnt that totally crushes my confidence...

i read them again, and it sounds like complete bs :| skilled non-skilled.. wtf :S

 

[George W. Bush]

I think by nonskilled s/he means structually unemployed

 

[charlie_charlie]

yeah thats what i mean...and the notes were confused and messed up. don't worry what i wrote, just listen to everyone else here

 

[charlie_charlie]

Okaaaay...sorry to bother everyone again but can u check if this definition (which i am putting in my own words) is correct:
The natural rate of unemployment and the NAIRU represent the labour constraints within an economy. They both refer to a point of equilibrium in a given wage level for the suppy and demand of labour, but there is still unemployment from the structurally, frictional and hard-core unemployed. ie cyclical unemployment is at 0, and so any attempt to increase workers by raising wage levels will only result in cost-push inflation. This is why the NAIRU (Non accelerating inflation rate of unemployment) can only be reduced through work and training porblems to improve the skills of unemployed people.

Well, maybe I stole the last line from the textbook...

 

[mushroom_head]

so what has the natural rate of unemployment got to do with inflation?? hehe..i still don't get it!

 

[kochou]

so natural rate of unemployment = NAIRU = full employment??

 

[[4m th4 8ur82]]

i still dont get it and i dont know why...i think i need a break from just trying to find out what the natural rate of unem. is...none of it makes sense....the natural rate of unem is the rate of unem. that is consistent with full emp.???!! double u tee eff....then there's the diagram curve thingy that comes with it...

...wait.. !! ok, i think it just clicked...brb

 

[ay_caramba]

they are the same thing... at the natural rate, u cant decrease unemployment by cutting wages or increasing aggregate demand, this would simply lead to inflation, thats why the natural rate is the NAIRU (Non Accelerating Inflation Rate of Unemployment)..
since the natural rate consists of the structural, frictional and hard-core unemployed, the only way to decrease it is thru microeconomic reforms- ie: retraining the structurally unemployed to get them back into jobs, improving job-matching services to reduce the no of frictionally unemployed (less unemployed ppl between jobs at any particular time) etc.
hope i dont sound confusing
chill

 

[ay_caramba]

btw the people included in the natural rate dont show up as supply of labour on the labour market graph..because they dont exert any pressure on wages, so are not really part of effective supply of labour
thats why there is still unemployment when all the *effective* supply of labour is being used
aargh sorry i hope u get it, im not so great at explaining