in that earlier graph, as economies approach the nairu, especially if they do so gradually, the estimate of it often seems to decline. this happens on the upside as well – a prolonged period of high unemployment seems to raise estimates of the nairu. some of you will know this path - dependence phenomenon by the unlovely name of ‘ hysteresis ’. at the current point in the global economic cycle, there is at least some chance that hysteresis will allow some of the economies with tight labour markets to grow a bit faster for a bit longer than might have previously been expected. but eventually, the point where wage growth starts to pick up is reached, and from there, inflation also increases. in australia, we estimate that there is still some spare capacity in the labour market. last year we published a central estimate of the nairu of around 5 per cent ( cusbert 2017 ). since then we have not seen a reason to change that broad assessment. but we are mindful that, as we approach that figure, there's a risk we find there is more room to come down before wage growth picks up in earnest. how much ( and how quickly ) will wage growth and inflation pick up? whatever judgement one might make about the extent of spare capacity, it is clear that both here and overseas, it is being absorbed. as it reaches the point of being fully absorbed, wage growth and inflation should increase. the question is, how much and how quickly will they pick up? for the technically minded, this is a question about the slope of the phillips curve. here in australia, wage growth has been quite weak even allowing for ( what we estimate to be ) the extent of spare capacity. our forecasts are for wage growth to pick up from here, but not immediately and then only gradually. we are seeing some signs of labour market tightening in the business surveys, which are telling us that suitable labour is becoming increasingly difficult to find. so far, though, the response to that difficulty has not been to pay people more to ensure they stay, or poach them from elsewhere. instead, we hear that firms are increasingly using other creative ways to attract and keep staff without paying across - the - board wage rises. these include everything from hiring bonuses, to offering extra hours, to increasing perks and workplace conditions. their reasons for doing so stem from the competitive landscape, or at least how it is perceived. even when facing strong demand and rising

further over the course of 2017. the three major advanced economies are all growing above the rate of growth of productive capacity, also known as the potential growth rate. this is clear from the large and ongoing declines in the unemployment rate. the question is how much spare capacity remains in these economies. so far, inflation hasn't picked up much, and neither has wage growth. this might normally suggest that there is still some spare capacity. as this graph shows, estimates of the ‘ full employment ’ rate of unemployment – the rate of unemployment below which wage growth starts to pick up – in fact suggest that the united states and japan are already at that point, if not below it. so are some of the individual countries within the euro area ( graph 1 ). this full employment rate of unemployment, or non - accelerating - inflation rate of unemployment ( nairu ), is inherently unobservable, so it has to be estimated. it can be estimated a number of ways, and there is a deal of uncertainty around those estimates. often, they come from statistical models which treat every undershoot in the inflation ( or wage growth ) outcome as a sign that the nairu is actually lower than you previously thought. graph 1 it's therefore useful to think about the economics, and the behaviour, underlying the existence of a nairu. it implies that there will still be some people unemployed at the point that firms have to start bidding up wage offers in order to find suitable staff. this is not so surprising when you consider that the labour market isn't homogeneous. there are so many different occupations and types of firms, and these aren't evenly distributed across the economy. so we shouldn't expect labour shortages to appear everywhere at the same time. what happens instead is that they turn up in a few pockets of the labour market, then a few more, and gradually become more widespread as conditions tighten. how quickly this happens depends partly on where the strong demand for labour is concentrated, and how much of the labour force has the applicable skills to perform those roles. so you'd expect wage growth to pick up more – and the nairu to seem higher – if the labour market is highly segmented and workers can't easily shift to the areas of strong demand. more flexible labour markets will, all else being equal, have lower nairus. some of the unemployment underlying the nairu simply reflects people who are between jobs, but will find one soon. ( this is sometimes