It's a rather simple concept. Explained below.

 

This is the ‘Non- accelerating inflation rate of unemployment’ at which there is no tendency for inflation to increase.

It is basically the same as equilibrium unemployment which can include structural and frictional unemployment.

 

If unemployment falls below the NAIRU, maybe because the government wants to stimulate AD to increase the level of jobs eventually available to people, inflation will increase. 

 

If unemployment rises above the NAIRU, maybe after government policies to reduce inflation, the wage rate and inflation will fall.  Why? Because if wage rate falls, people will have less money in their hands to spend which will reduce demand-pull inflation.  As wage rates fall, firms have to pay less to workers so Cost-Push inflation will also fall due to the fall in costs of production.

 

The NAIRU is difficult to observe and measure but it is estimated that the NAIRU has fallen from nearly 10% of the labour force in the early 1990’s to around 5% in the last few years.