The Phillips Curve

Anticipated Inflation:
Occurs where individuals
and groups correctly factor in expected changes in inflation into decision making
e.g. wage negotiations, contract discussions, etc.
Unanticipated Inflation:
Where changes in inflation are not factored into decision making can lead to:
Changes in distribution of income e.g.factoring in inflation above actual levels in
wage negotiations may lead to a redistribution of income from employers to
employees
Effects on Employment e.g. wage settlements higher than inflation due to
incorrect anticipation of inflation imposes costs on employers and may lead to job
losses

1958 Professor
A.W. Phillips
Expressed a statistical relationship between the rate of growth
of money wages and unemployment
from 1861 1957
Rate of growth of money wages
linked to inflationary pressure
Led to a theory expressing a trade-off between inflation and unemployment

Where the long run Phillips Curve cuts the horizontal axis would be the
rate of unemployment at which inflation was constant the so-called
Non-Accelerating Inflation Rate of Unemployment (NAIRU)
To reduce unemployment to below the natural rate would necessitate:
Influencing expectations persuading individuals that inflation was going to
fall
Boosting the supply side of the economy - increase capacity (pushing the PC
curve outwards)
Supply side policies have been focused on:
Education:
Boosting the number of those staying on at school
Boosting numbers going to university
Lifelong learning
Vocational education
Welfare benefits:
The working family tax credit
Incentives to work
Labour market flexibility
Expectations have been centred on:
Operational independence of the Bank of England
Tight control of public sector pay
The independence of the Bank of England has taken away interest rate
decision making from the government who may have been motivated by
political ends this has had the effect of influencing expectations.