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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5½ % = zero inflation
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5½ %
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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 5½ 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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