You students out there, see, even our politicians get hot and sweaty about plain old economic terms. Yesterday’s hot bed was the ‘non-accelerating inflation rate of unemployment’ or NAIRU. For the uninitiated, let me quote from my favourite economics textbook.
[The NAIRU] is the level of unemployment that does not result in increases in the inflation rate.
In theory, the Reserve Bank can go to town in squeezing the money supply to fight inflation and it won’t effect the NAIRU but it will impact on short-term unemployment. And so what is the level of the NAIRU at the moment? Well, inflation is accelerating, so it is higher than our current unemployment rate.
But there is something very important here: the NAIRU does not change with current discretionary policy variables. It relates to structural factors. So when Malcolm Turnbull asks this question:
“If the treasurer regards that (NAIRU) rate to be higher than 4.1 per cent, how many Australian jobs does he believe should be sacrificed to achieve it?”
a possible answer could be: none; at least if we are patient. Not that it is easy to do, but the government could try and put in place programs that will eventually reduce the NAIRU. Indeed, it appears to have fallen since I was an economics student and gets lower with every edition of my favourite textbook. The problem is that until that is done, our inflation rate will stay high and maybe get higher if unemployment stays down. Near as I can tell, that is what the Treasurer actually said.
The one thing we can do with the NAIRU is probably put a figure on it (or at least a range) by looking at how fast inflation has accelerated and decelerated in the past. That is why the concept is useful.