NAIRU (Non-Accelerating Inflation Rate of Unemployment)

The NAIRU, short for non-accelerating inflation rate of unemployment, is the level of unemployment at which inflation stays steady. If unemployment falls below it, labor becomes scarce, wages and prices rise faster and inflation tends to climb; if unemployment is above it, inflation tends to ease. Central banks, finance ministries and bodies such as the OECD and IMF estimate it to judge how much spare capacity an economy has.

The NAIRU is closely related to the natural rate of unemployment, a term introduced by Milton Friedman in 1968. The two are often used as synonyms, though they come from different ideas: the natural rate describes the unemployment rate the economy settles at once markets have adjusted, while the NAIRU is defined by what happens to inflation. Both rest on the expectations-augmented Phillips curve and both are central to modern monetary policy.

Think of a car on a long motorway. Below a certain speed the engine runs comfortably; push past it and the engine starts to overheat, and the temperature keeps climbing the longer you keep your foot down. The safe cruising speed is not printed on the dashboard, so the driver has to judge it from the gauges.

The NAIRU is that safe cruising point for the jobs market. If unemployment is pushed lower and held there, employers keep competing for scarce staff and prices keep speeding up. Policymakers cannot see the exact level, so they estimate it and watch wages and prices for warning signs.

Milton Friedman, in his 1968 presidential address to the American Economic Association, and Edmund Phelps, in papers in 1967 and 1968, argued that there is no lasting trade-off between unemployment and inflation. People eventually build expected inflation into wage bargains, so any attempt to hold unemployment below its natural level would need ever-faster inflation. Friedman described the natural rate as the level determined by real features of the labor market, such as how quickly workers and jobs are matched, the skills of the workforce, the minimum wage and benefits, not by central bank decisions.

The natural rate is mostly made up of frictional and structural unemployment, plus voluntary unemployment. "Natural" does not mean desirable or fixed; policies that improve job matching or skills can lower it. Friedman received the Nobel prize in 1976 and Phelps in 2006, partly for this work. The stagflation of the 1970s, when high inflation and high unemployment occurred together, was widely seen as supporting their view.

Franco Modigliani and Lucas Papademos introduced the term "noninflationary rate of unemployment" (NIRU) in 1975. The NAIRU label became standard later in the 1970s, stressing that unemployment below the threshold causes inflation to accelerate, not merely to be positive. A simple form of the relationship is:

• $\pi_t$ is inflation in period $t$ and $\pi_t^{e}$ is expected inflation, often proxied by last period's inflation.
• $u_t$ is the unemployment rate and $u^{*}$ is the NAIRU.
• $\beta$ measures how strongly inflation responds to the unemployment gap.

For example, if expected inflation is 2%, the NAIRU is 4.5%, unemployment is 3.5% and $\beta = 0.5$, then inflation is expected to rise to 2 + 0.5 × (4.5 − 3.5) = 2.5%. If unemployment stays at 3.5% and expectations catch up, inflation keeps rising by about half a point each period.

The NAIRU cannot be observed and must be estimated with statistical models, usually by asking what unemployment rate is consistent with stable inflation given other shocks such as energy prices. Estimates vary over time and between institutions, and confidence bands are typically more than a percentage point wide. The US Congressional Budget Office publishes a "noncyclical rate of unemployment". In September 2026 the median Federal Open Market Committee participant put the longer-run US unemployment rate at 4.2%. The Bank of England and the European Central Bank publish their own judgments of equilibrium unemployment in forecasts.

Estimates have shifted with experience. In the late 2010s, US and UK unemployment fell well below earlier NAIRU estimates without inflation taking off, leading many economists to lower their estimates and to argue the Phillips curve had flattened. The inflation surge of 2021 to 2023 then revived interest in labor-market tightness, measured also by the ratio of job vacancies to unemployed people and by the quit rate.

The gap between actual unemployment and the NAIRU acts as a labor-market version of the output gap. It enters policy rules such as the Taylor rule and helps central banks judge when to change interest rates. Estimates also help define full employment.

• Uncertainty. Because estimates are imprecise and revised often, critics argue that steering policy by the NAIRU risks raising rates too early and costing jobs.
• Hysteresis. If long spells of unemployment damage skills, the NAIRU itself depends on past unemployment, an idea called hysteresis raised by Olivier Blanchard and Lawrence Summers in 1986.
• Theoretical objections. Some post-Keynesian economists reject the concept, arguing inflation reflects bargaining power and supply shocks more than unemployment. Rational expectations economists argued that predictable policy cannot move unemployment even temporarily.

• Federal Reserve: Summary of Economic Projections, September 2026
• Nobel Prize: The Prize in Economic Sciences 2006