Letter: Balance of inflation and unemployment

Sir: I am one of those 'right-thinking' economists berated by Paul Ormerod (Letters, 6 February), who believes in the concept of the Non-Accelerating Inflationary Rate of Unemployment (Nairu).

Simply put, all this says is that, in the British context, using expansionary monetary and fiscal policy to push the unemployment rate much below 8 per cent will lead to rising inflation. Furthermore, it says that if we use contractionary monetary and fiscal policy to reduce inflation, we must push unemployment well above 8 per cent.

Thus the Nairu in Britain is around 8 per cent. And, far from tracking unemployment closely, it has remained at about this level for nearly 15 years.

The theory does not say that we cannot change the Nairu, only that we cannot change it by standard monetary and fiscal manipulation. It can be changed by other policies, however, and here I am not so pessimistic as Professor Ormerod. He seems to imply that only by changing the prevailing social values or the degree of social cohesiveness can we significantly reduce it.

In fact, a sensible unemployment benefit system (see Sweden), a sensible system of wage bargaining (see Germany or Japan) and a sensible training system (see almost anywhere in Northern Europe except Britain) to reduce the dramatic skill shortages in booms would do a great deal to help.

Perhaps we need a change in the prevailing social values to achieve any of these. If so, I fear we have a long wait.

Bashing the Nairu concept misleads the unwary into believing that all we need to do is have a large fiscal and monetary expansion and we can return to the unemployment levels of the Sixties. Unfortunately, given the present structure of the economy, we shall hit serious inflationary problems long before we get there.

Yours faithfully,

STEPHEN NICKELL

Director

Institute of Economics and Statistics

University of Oxford

Oxford

8 February