The United Kingdom NAIRU : Concepts, Measurement and Policy Implications

The behaviour of unemployment in the UK is of particular interest in the light of the far reaching programme of reforms introduced since 1980. The paper first outlines the main theoretical ideas behind the concept of equilibrium unemployment, drawing a distinction between the factors which may cause transitory, albeit long lived, departures from the short run NAIRU, and those which influence the long run NAIRU. Both are unobservable. The last decade and a half has seen substantial changes to the institutional structure of the UK labour market, such as the decline in the strength of trade unions, and the introduction of government policies to increase labour market flexibility. The impact of these on the NAIRU is assessed. Estimates of the NAIRU are discussed. The general picture is that, whether a reduced form fundamental supply equation or structural approach is adopted, the UK’s NAIRU reached a peak in the mid 1980s and has subsequently fallen, more in the case of the long run ...