NAIRU Explained: Why Unemployment and Inflation Matter in Australia (2025)

Australia’s job market is more than a monthly headline — it’s a key battleground in the fight against inflation. At the heart of economic debates in 2025 is the Non-Accelerating Inflation Rate of Unemployment (NAIRU), a wonky-sounding concept with real-world consequences for interest rates, wages, and your cost of living.

What Exactly Is NAIRU?

The NAIRU is the lowest level of unemployment an economy can sustain without triggering a rise in inflation. In simple terms: if unemployment falls below this threshold, employers start competing for scarce workers, pushing up wages and, ultimately, prices. Central banks — including the Reserve Bank of Australia (RBA) — monitor NAIRU to help set interest rates and keep inflation under control.

In 2025, the RBA estimates Australia’s NAIRU sits somewhere between 4.0% and 4.5%. But that number is constantly debated, as technology, migration, and government policy all shift the goalposts.

Why NAIRU Is Back in the Spotlight in 2025

After the rollercoaster of pandemic-era stimulus, Australia’s economic recovery has been marked by surging job creation, tight labour markets, and — for a while — stubbornly high inflation. The RBA’s recent monetary policy statements have made frequent reference to NAIRU, highlighting its importance in their decision to hold or raise interest rates.

• Inflation cooled to around 3.2% in early 2025, but remains above the RBA’s 2–3% target band.
• Unemployment edged up to 4.3% in March 2025, after hitting a 50-year low of 3.5% in 2023.
• Wage growth slowed to 3.4% annually, with some sectors (like tech and healthcare) still reporting skills shortages and pay rises well above average.

The RBA is watching the gap between actual unemployment and the NAIRU closely. Too much slack in the job market, and inflation will drop below target; too little, and price pressures could flare up again.

How NAIRU Affects Your Finances

While NAIRU might sound academic, it has a direct impact on household budgets, mortgage rates, and even your job prospects. Here’s how:

• Interest rates: If unemployment dips below NAIRU and inflation rises, the RBA is likely to hike rates, making home loans and credit more expensive.
• Wages: A labour market tighter than the NAIRU can mean better wage growth — but only if businesses can afford to pay more without passing costs onto consumers.
• Job security: When unemployment is near or below NAIRU, it’s generally easier to find a job. But if the RBA tightens policy to fight inflation, job growth could slow.

For example, in late 2024, the RBA raised rates in response to unemployment falling below 4%, citing risks of “unsustainable wage growth”. That made mortgages pricier for new borrowers and cooled property demand, but also helped nudge inflation back toward target.

Debates, Dilemmas, and the Future of NAIRU in Australia

Estimating NAIRU isn’t an exact science. Economists argue over:

• The impact of migration: With Australia’s migration program ramping up in 2025, some believe NAIRU could shift higher as more workers enter the market.
• Technology and remote work: Automation and flexible work arrangements may change the relationship between joblessness and inflation.
• Long-term unemployment: Some workers remain out of the labour force even as jobs grow, complicating the NAIRU calculation.

In 2025, the RBA has flagged that NAIRU may be “less stable” than previously thought, and is experimenting with new data sources to track wage pressures and labour market slack in real time. For everyday Australians, this means a more nuanced approach to monetary policy — and a recognition that the balance between jobs and inflation is always evolving.