Estimating the NAIRU and the Unemployment Gap

Abstract

Spare capacity in the labour market is an important input into forecasts of inflation and wage growth. This article describes how the Bank estimates one measure of spare capacity in the labour market – the gap between the unemployment rate and the non-accelerating inflation rate of unemployment (NAIRU). Model estimates of the NAIRU are highly uncertain and can change quite a bit as new data become available. The estimates suggest that the NAIRU has declined since the mid 1990s and is currently around 5 per cent.