NAIRU and welfare to work

Economic research has shown that there is a specific level of unemployment in an economy that does not cause inflation to increase - an equilibrium between the state of the economy and the labour market. This is NAIRU, the non-accelerating inflation rate of unemployment.

The NAIRU concept states that changes in monetary policy and aggregate demand will initially push inflation and unemployment in opposite directions, but in the long term reach a level of unemployment consistent with stable inflation. In the 1980s Richard Layard and Stephen Nickell developed the Layard-Nickell model of unemployment which showed there was an equilibrium level of unemployment below which inflation accelerated.

This research was the basis for the 'welfare to work' revolution: the model demonstrated how welfare to work policies could reduce this level of unemployment, and was used to support welfare policies all over Europe - especially in Scandinavia, Germany and Britain.