Inflationary and Deflationary Pressures Relative to Structural Unemployment

An economy is experiencing a steady inflation rate of 2% per year, which has remained unchanged for several quarters. The unemployment rate is holding constant at 5%. In this economy, the real wages that workers are bargaining for are consistent with the real wages that firms are willing to pay based on their pricing decisions. What can be concluded about the 5% unemployment rate?

Analyzing the Inflation-Stabilizing Unemployment Rate

The Mechanism of Inflation Stabilization

At the inflation-stabilizing rate of unemployment, the real wage desired by workers is higher than the real wage implied by firms' pricing decisions, and this persistent gap is what keeps inflation constant.