TIL: NAIRU. Non-Accelerating Inflation Rate of Unemployment refers to 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.
It’s a fascinating thing to realize that policymakers consider zero unemployment to be too low. The economy is built on the idea that some people at the bottom will be desperate enough to keep minimum wages low.
Zero unemployment would be bad because it would imply there’s no churn of people leaving one job for another. Back last year when unemployment was 3.5% most of that is people choosing to leave a job to find a new one.
But on average a few percent of people will be unemployed at the moment the survey week is conducted. And that is what the unemployment rate is measuring.
Let's look at this mathematically. If the average person changes jobs every four to five years, and spends two-three weeks unemployed doing so, as they already have a plan for their next job, you would expect a job-related unemployement rate of around 1% due to job changes.
In practice it makes up around 2%. The remainder in good times is people who were just fired, a few layoffs (since even in booms businesses can fail) and a few people entering the workforce.
Unemployment to some degree is functionally a form of a buffer or reserve of labor. Obviously there is also a measure of skill mismatch, lag time, and similiar as well but lacking a reserve leads to disruptions which interupt growth and advancement.
While there is a bias against raising minimium wage there is also a fundamental constraint - if a job can't pay for itself in value generation it isn't sustainable.
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.
https://en.wikipedia.org/wiki/NAIRU