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Working Paper No. 202 | August 1997

Aggregate Demand, Investment, and the NAIRU

The nonaccelerating inflation rate of unemployment, or NAIRU, is generally viewed as a supply-side-determined, short-run equilibrium rate of unemployment. In most NAIRU models, aggregate demand plays no essential role in determining equilibrium unemployment. However, Visiting Scholar Malcolm Sawyer demonstrates that the relationship between the real wage and employment (often mistakenly called labor demand) cannot be fully articulated without reference to aggregate demand. In Sawyer's model, investment shifts the real wage-employment relationship by adding to the capital stock. Therefore, in a sufficiently expansionary environment, the NAIRU can be made compatible with full employment.


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