How To Calculate NAIRU

The Non-Accelerating-Inflation Rate of Unemployment (NAIRU) is a measure of much unemployment would change in a given year independent of inflation. That is to say how much unemployment would change with no upward or downward pressure from inflation. Calculating the NAIRU requires data on both the yearly inflation rate and unemployment rate over a period of time and preferably some kind of statistical software.

Step 1

Take the data for inflation and unemployment and graph the unemployment rate against inflation lagged one year and enter it into whatever software you are using.

Step 2

Find the line of best fit. Ordinary least squares regression is suitable for this. The curve you find is known as the Phillips curve.

Step 3

Find the slope of the Phillips curve.

Step 4

Subtract the slope of the Phillips curve from the unemployment rate of the year you are trying to calculate the NAIRU for.

Step 5

The resulting number is the NAIRU.