PHILLIPS

CURVE
 INTRODUCTION
 The Phillips curve is an economic concept
developed by A.W Phillips
 A.W Phillips published his observations about
the inverse correlation between wage changes
and unemployment in Great Britain in 1958 and
was found to hold true for other industrial
countries, as well.
 Textbooks written in 1960s and early 1970s
relied on it as the main explanation of inflation.
 INTRODUCTION
 The theory claims that with economic growth
comes inflation, which should lead to more jobs
and less unemployment.
 However the concept has been somewhat
disproven empirically due to the occurrence of
stagflation.
 Stagflation means both unemployment and
inflation is high.
 In 1970s the curve relationship became unstable
and unusable for policy-making.
 PHILLIPS CURVE
 In 1950s and 1960s, there was a remarkably
smooth relationship between the unemployment
rate and the rate of inflation.
 The Phillips Curve is a downward-sloping
curve.
 The rule is: the higher the unemployment rate
is, the lower the rate of inflation or vice versa.
 Unemployment rate and inflation rate in Phillips
curve has an inverse relationship.
 AGGREGATE SUPPLY and AGGREGATE
DEMAND ANALYSIS and THE PHILLIPS CURVE

1 2 3
 EXPECTATIONS AND THE
PHILLIPS CURVE
 If the inflation is expected to be high in the
future, wages are likely to be higher than if
inflation is expected to be low.
 Wage inflation is thus affected by expectations of
future price inflation.
 Because wages are input costs, prices rise as
firms respond to the higher wage costs.
 Price expectations that affect wage contracts
eventually affect prices themselves.
 If the rate of inflation depends on expectations,
the Phillips Curve will shift as expectations
change.
 If inflationary expectations increase, the result
will be an increase in the rate of inflation even
though the unemployment rate may not have
changed and the Phillips Curve will shift to the
right.
 If the inflationary expectations decrease, the
curve will shift to the left and there will be less
inflation at any given level of unemployment
rate.
 INFLATION AND AGGREGATE DEMAND
 When the Phillips Curve became unstable
and unusable for policy-making in 1970s
because of stagflation, it does not mean that
the aggregate demand has no effect on
inflation.
 It simply means that inflation is not only by
aggregate demand but also by other factors.
 Other factors could be cost variables like the
prices of imports.
LONG-RUN PHILLIPS CURVE
 Phillips curve in the long run is vertical at
some natural rate of unemployment.
 Wherein natural rate of unemployment
refers to the unemployment that occurs as a
normal part of the functioning of the
economy.
 Changes in aggregate demand- including
increases in government spending- increases
prices, but do not change employment.
 Natural rate of unemployment is sometimes
taken as the sum of frictional and structural
unemployment.
 The logic behind the vertical Phillips Curve is
that whenever the unemployment rate is pushed
below the natural rate, wages begin to rise, thus
pushing up costs.
 This leads to a lower level of output which
pushes the unemployment back up to the natural
rate.
 At the natural rate, the economy can be
considered to be at full employment.
THE NONACCELARATING INFLATION RATE
OF UNEMPLOYMENT (NAIRU)
 The value of unemployment rate where the
Phillips Curve crosses zero is called
nonaccelarating inflation rate of unemployment
(NAIRU).
 If the actual unemployment rate is to the left of
the NAIRU, the change of inflation rate will be
positive.
 On the other side, if the actual unemployment
rate is to the right of the NAIRU, the change in
the inflation rate is negative.
 HIGHER WAGES
 More and more Filipinos, professionals like
nurses and doctors, are taking a risk working
abroad rather than working in his or her own
country beside his or her family.
 But what was the reason? – higher wages
 Wages on other countries are much higher,
whenever it is converted into our currency.
 It is said that when unemployment rate decreases
the expected inflation rate increases.
 That is why wages on other countries are higher
than here in the Philippines.
 Their unemployment rate are much lower than
compared here.
COMPARISON OF THE
UNEMPLOYMENT RATE
AND INFLATION RATE
IN ASEAN
 2016 2017
UNEMPLOYME INFLATIO UNEMPLOYME INFLATION
NT RATE N RATE NT RATE RATE

Philippines
5.5% 1.78% 5.7% 3.18%

Brunei
6.94% -0.73% 7.08% -0.14%
 COMPARISON OF THE
UNEMPLOYMENT RATE AND
INFLATION RATE
IN EUROPEAN UNION
 2016 2017
UNEMPLOYM INFLATIO UNEMPLOYME INFLATION
ENT RATE N RATE NT RATE RATE

Croatia 13.1% -1.1% 11.5% 1.1%

Bulgaria 7.57% -1.3% 6.28% 1.2%

Prepared By:
Abesa, Charlotte A.
Cu, Aljean May O.
Garil, Jing-Jing B.
Sena, Margielyn T.
Torero, Lyka M.
 “CAN A BEE
EVER
BE
UNEMPLOYED?”