Phillips curve

In macroeconomics, the Phillips curve is a supposed inverse relationship between inflation and unemployment.

Related Topics:
Macro - Economics - Inflation - Unemployment

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The British economist A.W. Phillips, in his 1958 paper "The relationship between unemployment and the rate of change of money wages in the UK 1861-1957" publised in Economica, observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined. Similar patterns were found in other countires and in 1960 Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment -- when inflation was high, unemployment was low, and vice-versa. As seen to the right, when drawn on a graph with the inflation rate on the vertical axis and the unemployment rate on the horizontal axis, the relationship between the variables showed a downward sloping curve, the Phillips curve (PC).

Related Topics:
A.W. Phillips - Economica - Paul Samuelson - Robert Solow

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

It is little known that the American economist Irving Fisher pointed to this kind of Phillips curve relationship back in the 1920s. On the other hand, Phillips' original curve described the behavior of money wages. So some believe that the PC should be called the "Fisher curve."

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In the years following his 1958 paper, many economists in the advanced industrial countries believed that Phillips' results showed that there was a permanently stable relationship between inflation and unemployment. One implication of this for government policy was that governments could control unemployment and inflation within a Keynesian policy. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment – there would be a trade-off between inflation and unemployment. For example, monetary policy and/or fiscal policy (i.e., deficit spending) could be used to stimulate the economy, raising gross domestic product and lowering the unemployment rate, as shown by the change marked A in the diagram. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.

Related Topics:
Keynesian - Trade-off - Monetary policy - Fiscal policy - Deficit spending - Gross domestic product

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

To a large extent, a leftward movement along the PC describes the path of the U.S. economy during the 1960s, though this move was not a matter of deciding to achieve low unemployment as much as an unplanned side-effect of the Vietnam war. In other countries, the economic boom was more the result of conscious policies.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~