A W Phillips
A W Phillips - Related Videos
01:28
The Emergence of the Phillips Curve
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2026
Economists have long explored how unemployment and inflation are related. In the 1950s, the economist A. W. Phillips analyzed almost a century of data from the United Kingdom to study this connection. His research examined the relationship between unemployment and changes in nominal wages. Phillips discovered that unemployment was usually low when nominal wages increased rapidly and high when nominal wages rose slowly.When employment opportunities are abundant and workers are few, firms compete...
01:24
Breakdown of the Phillips Curve (1970s)
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2026
During the 1960s, a stable trade-off between the inflation rate and the unemployment rate was observed, as represented by the Phillips curve. According to this relationship, low unemployment was generally associated with high inflation, while high unemployment was associated with low inflation. However, during the 1970s, this relationship broke down.A sharp rise in oil prices in 1973 led to higher production costs across various industries. At the same time, unemployment also increased,...
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The mechanism runs through workers’ bargaining power and firms’ competition for scarce employees. When unemployment is lower, employers may offer faster wage increases to attract or retain staff. This links labor-market conditions to wage inflation and explains why employment conditions are central to interpreting the relationship associated with Phillips’s work.
Expectations change how workers and firms respond to economic conditions. If people anticipate continuing inflation, they may build higher price or wage increases into their decisions, reducing the extent to which lower unemployment can produce a lasting change in inflation. Later research therefore treated the trade-off as mainly short run rather than permanent.
Stagflation highlights the limits of treating inflation and unemployment as reliably opposing outcomes. It describes circumstances in which inflation and weak employment conditions occur together, undermining a straightforward policy choice between the two. Phillips-curve analysis consequently incorporates expectations and policy credibility when explaining why the short-run relationship may not persist.
Analysts can use it to examine how policies affecting economic conditions might influence unemployment, labor-market pressure, and inflation over the short run. They must then consider whether households and firms will adjust their inflation expectations. This approach prevents policymakers from treating an observed relationship as a dependable long-term trade-off.
It helps policymakers organize the potential consequences of pursuing tighter labor-market conditions. Lower unemployment may coincide with stronger wage growth and greater inflation pressure, while attempts to restrain inflation may involve weaker employment conditions. The framework does not select a policy automatically, but it clarifies the trade-offs that monetary and fiscal decisions may create.
Its importance lies in connecting observed labor-market conditions with wage inflation, giving macroeconomists a framework for studying employment and price pressures together. Subsequent work expanded that framework by adding inflation expectations, which helped interpret the limits of a lasting trade-off, the experience of stagflation, and the importance of credible policy.