In Chapter 1, the concept of a natural rate of unemployment was briefly mentioned. As discussed, this is the rate of unemployment below which the economy cannot be pushed and still expect to have stable inflation. This rate is perhaps more accurately called the nonaccelerating inflation rate of unemployment or NAIRU. In other words, it is the unemployment rate that is consistent with stable or nonaccelerating inflation. Economists disagree over whether the two terms refer to the same thing, but this book will not debate that issue. For our purposes, the NAIRU and the natural rate of unemployment both refer to that rate of unemployment that is consistent with stable or nonaccelerating inflation. Given this definition, NAIRU is the more accurate term and is the term used in our examination of unemployment levels and inflation.
What is the NAIRU, and why does it exist? What determines it, and what causes it to change? How do government policies affect the NAIRU, and can government policies reduce it? These are the questions addressed in this chapter.
Let us begin by providing some evidence that a NAIRU does exist in the United States and discussing why it exists. To document more clearly the existence of a NAIRU in the United States, evidence of an unemployment rate below which inflation begins to accelerate or an unemployment rate that is consistent with stable inflation is presented.