Definition of Nairu

The term NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment. It is a concept in economic theory significant in the interplay of macroeconomics and microeconomics. This "full employment" unemployment rate is sometimes termed the "inflation-threshold unemployment rate": if actual unemployment falls below the NAIRU, the inflation rate is likely to rise quickly (accelerate). It is sometimes referred to as the "natural rate of unemployment" as well, although this term describes an estimated unemployment rate derived from the market's actual performance while the NAIRU is calculated from the Philips Curve. The point at which the Philips curve, which relates unemployment to inflation, intersects the horizontal axis indicates the NAIRU. In terms of output, the NAIRU corresponds to potential output, the highest level of real gross domestic product that can be sustained at any one time. This is also called the "natural gross domestic product."