Phillips curve

Phillips curve is an economic concept developed by A.W. Phillips that illustrates a historical inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy. Named for the New Zealand economist A. W. Phillips, the concept has been described as one of the key building blocks of modern macroeconomics.

History

The Phillips curve was first identified in the work of New Zealand economist A.W. Phillips in a 1958 paper. The paper examined wage inflation and unemployment in the United Kingdom from 1861-1957, and Phillips found an inverse relationship between wage inflation and unemployment. This relationship became known as the Phillips curve.

Description

The Phillips curve represents the relationship between the rate of inflation and the unemployment rate. The 'curve' is a graphical representation of this economic relationship. The original Phillips curve showed that there was a stable and inverse relationship between unemployment and wage inflation in an economy; as unemployment decreased, wage inflation increased.

Criticisms and modifications

The Phillips curve has been criticized for its simplicity and its assumptions. Some economists argue that the relationship between inflation and unemployment is not stable and can change over time. In the 1970s, many countries experienced stagflation, a combination of high inflation and high unemployment, which contradicted the original Phillips curve.

In response to these criticisms, economists have modified the Phillips curve to include expectations of inflation. This modified curve, known as the expectations-augmented Phillips curve, suggests that only unexpected inflation can lower unemployment.

See also

• Inflation
• Unemployment
• Stagflation
• Macroeconomics