The principle fear of low unemployment is that it will cause inflation to increase. If the government wants to reduce the inflation rate, it must reduce demand so as to drive unemployment above this rate, termed “the no accelerating inflation rate of unemployment.” NAIRU is an example of the economy where the government is trying to keep employment high by keeping demand high. The problem is a labor shortage causes higher premiums to be paid for skilled labor. The government must accept an unemployment rate that is sufficiently high on the average demand to real wages do not exceed their productivity growth, and firms do raise their prices faster than their costs. Work productivity must be the determining factor for real wages. [Learn More ...]

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