Hi Aiden

I agree there are problems with the NAIRU.

I was more concerned to explain the history of how it came to supplant the Phillips curve. The author implies it was an ideological choice intended to provide a rationalisation for governments to do nothing about unemployment. That is wrong on two counts. Firstly, the reason the Phillips curve was abandoned (or modified to take account of inflationary expectations, which took it close to being a NAIRU anyway) was because of the simultaneous increases in inflation and unemployment in the 1970s, which weren’t supposed to happen. Second, the NAIRU does not imply that governments can, or should, do nothing about unemployment, only that some types of measures will not be effective beyond a certain point. It can actually support an interventionist approach to labour markets. For example, much of Keating’s “Working Nation” package was aimed at reducing unemployment by measures that would effectively shift the NAIRU, such as retraining and employment incentives.

It’s a while since I studied these things in detail, but it seems to me both Phillips curves and NAIRUs have been overtaken by other ideas, like hysteresis. Hysteresis seems to be a reasonable description of how labour markets have worked in recent decades, but doesn’t have much explanatory power that could translate into a policy program.

Rhian, you may not have noticed it, but basing policy decisions on the NAIRU has been used by politicians (and public servants) as an ideological choice. It's worse than doing nothing: the 2010 interest rate rises were a deliberate attempt by the RBA board to keep the unemployment rate high because they thought that was the only way to keep the inflation rate low. But there was no real inflation threat, and doing nothing would've probably been sufficient.

As for the Phillips curve, the problem was that externally imposed cost push inflation (as happened when OPEC cut oil supply) raised the inflation rate without a corresponding drop in the unemployment rate. Phillips (and indeed Keynes) failed to anticipate that problem, but the basic idea is still sound.

Hi Aiden

Did the RBA think we were at or below the NAIRU in 2010? It seems unlikely, as the rate had risen over the previous 2 years after the GFC, it actually fell a bit in 2011, and it had been significantly lower in 2006-2008 with no evidence of an inflationary breakout.

The OPEC price shock exacerbated stagflation in the 1970s, but didn’t start it. Wages growth was in double figures by 1971 and inflation was over 7%, while unemployment was climbing (though low by today’s standards). The first major oil shock didn’t hit until 1973, by which time inflation was already over 10%.

Ian Macfarlane’s Boyer lecture on the period is quite interesting.

http://www.abc.net.au/radionational/programs/boyerlectures/lecture-2-from-golden-age-to-stagflation/3353140