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nology first introduced by James Tobin (following the lead of Franco Modigliani), this equals the Non-Accelerating Inflation Rate of Unemployment (NAIRU) when the real gross domestic product equals potential output. This concept is identical to the 'natural' rate but reflects the fact that there is nothing 'natural' about an economy.

At this level of unemployment, there is no unemployment above the level of the NAIRU. That is, at full employment there is no cyclical or deficient-demand unemployment. If the unemployment rate stays below this 'natural' or 'inflation threshold' level for several years, it is posited that inflation will accelerate, i.e. get worse and worse (in the absence of wage and price controls). Similarly, inflation will get better (decelerate) if unemployment rates exceed the NAIRU for a long time. The theory says that inflation does not rise or fall when the unemployment equals the 'natural' rate. This is where the term NAIRU is derived.

The level of the NAIRU thus depends on the degree of 'supply side' unemployment, i.e., joblessness that can't be abolished by high demand. This includes frictional, structural, and classical unemployment.

Phillips curve

Ideas associated with the Phillips curve questioned the possibility and value of full employment in a society: this theory suggests that full employment—especially as defined normatively—will be associated with positive inflation. The Phillips curve tells us also that there is no single unemployment number that one can single out as the 'full employment' rate. Instead, there is a trade-off between unemployment and inflation: a government might choose to attain a lower unemployment rate but would pay for it with higher inflation rates. In 1968, Milton Friedman, leader of the monetarist school of economics, and Edmund Phelps posited a unique full employment rate of unemployment, what they called the 'natural' rate of unemployment. But this is seen not as a normative choice as much as something we are stuck with, even if it is unknown. Rather than trying to attain full employment, Friedman argues that policy-makers should try to keep prices stable (a low or even a zero inflation rate). If this policy is sustained, he suggests that the economy will gravitate to the 'natural' rate of unemployment automatically.

Structural unemployment

Some Economists estimate a 'range' of possible unemployment rates. For example, in 1999, in the United States, the Organization for Economic Co-operation and Development (OECD) gives an estimate of the 'full-employment unemployment rate' of 4 to 6.4%. This is the estimated 'structural' unemployment rate, (the unemployment when there is full employment), plus & minus, the standard error of the estimate. (Estimates for other countries are also available from the OECD.)

Full employability

Full employability indicates an attempt by government to make people 'employable' by both positive means (e.g. training courses) and negative means (e.g. cuts in benefits). It does not necessarily create full employment.

The OECD on measuring the NAIRU