1. What is NAIRU?

⮚ NAIRU expands to non-accelerating inflation rate of unemployment and is often called the long-run
Phillips Curve. It refers to the level of unemployment that does not let the inflation to rise. It indicates
the equilibrium between the labor market and the state of the economy. 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. 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.
2. Using logical interpretation of data provided in the following articles, what do you think is the
correct estimate of NAIRU in US? How Low Can Unemployment Really Go? Economists Have
No Idea by Neil Irwin. The Unemployment Rate at Full Employment: How Low Can You Go?
By
JARED BERNSTEIN and DEAN BAKER
⮚ According to the details given in the reports, the NAIRU in USA is between 5% - 5.5%. The
Congressional Budget Office estimated that Nairu is 5.5 percent, and Fed leaders’ forecasts are in the
same ballpark. However, the estimates have proven to be unreliable as the number is shaped by the
factors that are hard to calculate, like the frictional unemployment rate, technology that people use to
match up with new employers and people’s willingness to relocate for work. The number derived is a
product of guesswork, intuition, assumptions and use of historical data.

Please read the article “Unemployment looks like 2 000 again. But wage growth doesn’t ” by
Enrie Tedesche. It is commonly understood that as unemployment level falls, wage rate will
rise across all groups of employed people. Recent data in US shows that the level of
unemployment has fallen over the years, averaging about 4% over the past year. Moreover,
job opening is at record high, implying that demand for labor is high. As labor gets scarce, it is
expected that wages will increase. However, wage growth currently in US is much slower
than during corresponding situation earlier, 2.9% over the past year compared to 4.2% in
2001.
3. According to the author what are the different reasons that may explain the slow wage
growth in US?

⮚ The author says that one of the possible reasons to explain this activity can be the change in
demographics of the work force. The work force may be older than that of the base year. However, he
dismisses this reason right away as considering other aspects of the demographics indicate a slow
growth in wages, which leads to an inconclusive research. He suggests that there must more slack in
the labor market than the unemployment indicates. Moreover, he questions the rate of non-participative
labor force as they usually go unrecorded while calculating unemployment rate. An increase in the non-
participative labor force would lead to a decrease in the unemployment rate. He suggests that reasons
like employer concentration (dominance of an employer over a significant part of the labor market) is
rising, fall of unions and rise of inequality could be the reasons for this as well.
4. What is the relation between wage growth and productivity?
⮚ Numerous studies have traced the cause of the productivity acceleration to technological innovations
in the production process that sharply lead to reduction in the prices of components and of the products
that contain them. The impact of more rapid productivity growth on wages continues to be a topic of
widespread economic research. The failure of wages to increase in line with productivity is much
discussed upon. Less appreciated, perhaps, is that the productivity acceleration has been accompanied
by important changes in the way businesses compensate their employees, leading to use of ‘variable
component’ in the wages of the employees. With increasing productivity, the need for labor has been
seen to slow down leading to a slow growth in wages.