Phillips Curve

The relation between inflation

and unemployment
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Phillips Curve
A. W. Phillips (1958), The Relation Between
Unemployment and the Rate of Change of Money
Wage Rates in the United Kingdom, 1861-1957,
Economica
Phillips observed an inverse relationship between
money wage changes and unemployment in the
British economy over the period examined
Many economists in the advanced industrial
countries believed that his results showed that there
was a permanently stable relationship between
inflation and unemployment
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5 % = zero inflation
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5 %
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There exists a stable relationship between
the variables. The relationship has not
substantially changed for about 100 years
Negative, nonlinear correlation
Wages remain stable/stationary
( =0) when unemployment is 5 percent
Phillips Conclusions
w
dw
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Conclusions - continued
From the dispersion of the
data points, Phillips
concluded that there was a
countercyclical loop:
Money wages rise faster
as du/dt decreases
Money wages fall slower
as du/dt increases
Implies an inflationary
bias, and is consistent
with sticky wage theory
u
slower
faster
w
dw
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Problems with Phillips Study
Empirical method of study
Stagflation: In the 1970s, many countries experienced
high levels of both inflation and unemployment
Friedman argued that the Phillips curve relationship was
only a short-run phenomenon
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Thanks