Thursday, 5 April 2012

NAIRU phobia.

Mention NAIRU in Modern Monetary Theory circles, and all hell is liable to break out. You’ll be told that NAIRU is an idea that has never been proved or that no one knows what level of unemployment actually corresponds to NAIRU, so the concept is useless.

However, if you refer to the idea but give it a different name, that causes no problems for some strange reason.

Alternative names include the “natural level of unemployment” – an idea / phrase that preceded NAIRU. There is Bill Mitchell’s “inflation barrier”. And there is the idea that an economy can be working “at capacity” or “below capacity”.

Of course the above concepts are not IDENTICAL. But they are so similar that I just cannot be bothered with the differences.

The natural level.

For example the “natural level” is the idea, first, that there is some minimum possible level of unemployment before inflation becomes unacceptable. To that extent, the “natural level” is identical to NAIRU.

However the two part company in that the natural level idea says that given excess AD, inflation rises to an unacceptably high but STABLE level, whereas NAIRU says inflation ACCELERATES. Hence the “A” in NAIRU.

Now I realise thousands of economists have kept themselves employed at the taxpayer’s expense in recent decades dreaming up models that support the natural level as against NAIRU or vice versa, but frankly the difference between the two is trifling as far as I’m concerned.

If inflation is unacceptably high, then it is unacceptably high. As to whether inflation ACCELERATES or not I’m not greatly bothered: though if NAIRU is a superior model to the natural level that just means that excess inflation of some given amount is a more serious matter than it otherwise would be.

The inflation barrier.

As to Bill Mitchell’s “inflation barrier” he has never set out in great detail what this consists of. Possibly this is because having attacked NAIRU, he then discovered that the NAIRU / inflation barrier / “at capacity” idea was indispensable. So he cannot now set out what his “inflation barrier” idea too clearly because the similarities to NAIRU would be a trifle embarrassing.

At capacity.

As to the idea that the economy can be “at capacity” this shares with NAIRU the defect that no one knows at exactly what level of employment the economy is at capacity. But for some bizarre reason this is allegedly a defect in NAIRU, but not a defect in the “at capacity” concept.

Why unmeasurable concepts are useful.

The fact that a concept or relationship or variable has never been measured or cannot be measured does not stop the concept being useful. These sort of unmeasured concepts crop up over and over in science.

Particle physicists have time and again posited the existence of sub-atomic particles before such particles have actually been seen or had their mass or other characteristics measured.

I’m not a mathematician, but I understand that the square root of minus one kept cropping up in maths well before anyone had a clear idea of what the square root of minus one actually was. And mathematicians plonked the square root of minus one into their equations, despite not knowing what it was, because it seemed to be a valid concept. They couldn’t do without it.



  1. The problem is that there isn't just one NAIRU. There are multiple inflation barriers in the job market at different levels of skills and payment.

    Distilling it down to one concept is as misleading as suggesting that savings are required to fund loans - just because some loans end up like that.

    1. As far as I know none of the advocates of the NAIRU / natural level idea have ever denied that markets for specific skills each have their own NAIRU. I certainly haven’t. Nor have they ever denied the obvious fact that overall labour shortages in some geographical areas often co-exist with excess unemployment in others.

      But the existence of those “mini-NAIRUs” does not invalidate the basic NAIRU / natural level / “at capacity” idea, namely that as unemployment for the country as a whole falls, a point comes at which demand pull inflation becomes excessive.


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