Aggregate Demand, Investment, and the NAIRU

The nonaccelerating inflation rate of unemployment, or NAIRU, is generally viewed as a
supply-side-determined, short-run equilibrium rate of unemployment. In most NAIRU models,
aggregate demand plays no essential role in determining equilibrium unemployment. However,
Visiting Scholar Malcolm Sawyer demonstrates that the relationship between the real wage and
employment (often mistakenly called labor demand) cannot be fully articulated without reference
to aggregate demand. In Sawyer’s model, investment shifts the real wage-employment
relationship by adding to the capital stock. Therefore, in a sufficiently expansionary environment,
the NAIRU can be made compatible with full employment.