The Tradeoff Between Inflation and Unemployment

Okun's Law describes a clear relationship between unemployment and national output, in which lowered unemployment results in higher national output. Such a relationship makes intuitive sense: as more people in a nation work it seems only right that the output of the nation should increase. Building on Okun's law, another economist, A. W. Phillips, discovered a relationship between unemployment and inflation. The chain of basic ideas behind this belief follows: as more people work the national output increases, causing wages to increase, causing consumers to have more money and to spend more, resulting in consumers demanding more goods and services, finally causing the prices of goods and services to increase. In other words, Phillips showed that unemployment and inflation shared an inverse relationship: inflation rose as unemployment fell, and inflation fell as unemployment rose. Since two major goals for economic policy makers are to keep both inflation and unemployment low, Phillip's discovery was an important conceptual breakthrough, but also posed a troublesome challenge: how to keep both unemployment and inflation low, when lowering one results in raising the other?