From the 1950s onwards, the macroeconomic models of the neoclassical synthesis, based a system of simultaneous equations, focused on the interaction between the market for goods and services and the money market in the context of a general equilibrium analysis. According to John Hicks (1904-1989), in the general case, the capitalist economy is at full employment level of output. The underlying employment theory is based on the demand and supply of labour in a competitive market. In fact, this neoclassical approach supposes that price adjustment market mechanisms could guarantee full employment. In same specific cases, however, the general equilibrium implied by the IS-LM model could not necessarily correspond to a full employment level of output. This situation, called unemployment equilibrium, would be the result of market imperfections, such as rigid money wages, interest-inelastic investment demand, income-inelastic money demand, among others.
In the 1960s, mainstream macroeconomic models expanded the analysis of the negative correlation between inflation and unemployment. This correlation was based on the conclusions drawn from an empirical study -the Philips curve- about the negative relationship between the evolution of the rate of employment and the rate of variation of nominal wages in England at the turn of the 20th century. The attempt to incorporate the Phillips curve (trade-off between inflation and unemployment) in the analysis of the labour market dynamics turned out to put emphasis on the role of nominal wages in determining prices, and ultimately, on the demands of workers that put pressure on inflation.
As a matter of fact, since the late 1960s, the economic scenario of inflation and unemployment in the OECD countries enhanced the spread of the ideas of Milton Friedman, who proposed new monetary policy suggestions founded on the acceptance of the short run trade-off between inflation and unemployment. After a period of expansionary monetary policy, as businessmen and workers calculate future prices and wages after considering the information they have at present, the rise in the short-run levels of inflation would be reinforced by higher inflationary expectations and higher nominal wages and prices. For Friedman, expectations are adaptive and, in the long run, the trade-off between unemployment and inflation does not exist. In practice, the promotion of price stability could require a higher level of unemployment in the short-run. In the long-run, unemployment would be stuck at its natural level.
The Monetarist school of economics eventually made its way into the neoliberal policies of Reagan and Thatcher and formed the core of the proposals of the economists that defend the Washington Consensus agenda. Since these economists have been much more concerned with the effects of inflation on the economy, the economic policy recommendations that priviledge the inflation targeting takes for granted the existence of a natural level of unemployment, the so called non-accelerating inflation rate of unemployment (NAIRU).