The NAIRU

The nonaccelerating inflation rate of unemployment, or NAIRU, has acquired a central role in
macroeconomic theory. Fear of inflation has led to a reluctance to allow the unemployment rate
to fall below the estimated NAIRU. If so much weight is going to be placed on an estimate of a
theoretical variable, it is extremely important to know how valid that theory is and how valid the
estimates of that variable are. Visiting Scholar Malcolm Sawyer finds that the mechanism by
which an economy would reach a NAIRU has been inadequately specified and that NAIRU
models have ignored the role of aggregate demand by implicitly invoking Say’s law that supply
creates its own demand. He concludes that it is unwise to use the estimated NAIRU as a policy
variable unless and until it can be established on stronger theoretical and empirical grounds.