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The NAIRU, Aggregate Demand and Investment
Author(s) -
Sawyer Malcolm
Publication year - 2002
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/1467-999x.00137
Subject(s) - nairu , economics , unemployment , aggregate demand , wage , context (archaeology) , investment (military) , inflation (cosmology) , full employment , labour economics , econometrics , macroeconomics , phillips curve , monetary policy , paleontology , physics , biology , politics , political science , theoretical physics , law
The nature of the non‐accelerating inflation rate of unemployment (NAIRU) is analysed. The focus of our analysis is the role of aggregate demand and capacity in the context of the NAIRU. Two aspects of the relationship between the level of aggregate demand and the NAIRU are of particular significance. First, it is argued that the real wage–employment relationship based on enterprise decisions cannot be fully articulated without reference to the level of aggregate demand. Second, a model which allows for variable returns to labour and the notion of full capacity is used to explore the effects of shifts in the capital stock on the real wage–employment relationship. The model is specifically used to explore whether a sufficiently expansionary environment can generate sufficient investment to shift that relationship until the NAIRU is compatible with full employment. A number of limitations on the conclusions reached are considered, and the policy implications are briefly considered.