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NAIRU (natural rate of unemployment)

The unemployment rate consistent with stable inflation; below it, wage and price pressure is supposed to build, above it, inflation should ease.

NAIRU is unobservable and drifts with demographics, matching efficiency and the structure of the labour market. Estimates for the United States fell from around 6% in the 1990s to near 4.5% today, and those revisions were made after the fact.

The practical lesson from the late 2010s is humility: unemployment ran below every contemporaneous NAIRU estimate for years with no inflation acceleration, which suggested the estimate was simply too high. Treat it as a slow-moving anchor, not a trigger.

Example: unemployment is 3.8% against a NAIRU estimate of 4.4%, implying a tight labour market. With an Okun coefficient of 2, that 0.6 point gap maps to an output-gap near plus 1.2%.

Related: phillips-curve, unemployment-rate, output-gap, okuns-law, potential-gdp

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