Phillips curve

For the Phillips curve in supernova astrophysics, see Phillips relationship.
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The Phillips curve is an economic model, named after Bill Phillips, that correlates reduced unemployment with increasing wages in an economy.[1] While Phillips did not directly link employment and inflation, this was a trivial deduction from his statistical findings. Paul Samuelson and Robert Solow made the connection explicit and subsequently Milton Friedman[2] and Edmund Phelps[3][4] put the theoretical structure in place.

While there is a short-run tradeoff between unemployment and inflation, it has not been observed in the long run.[5] In 1967 and 1968, Friedman and Phelps asserted that the Phillips curve was only applicable in the short run and that, in the long run, inflationary policies would not decrease unemployment.[2][3][4][6] Friedman correctly predicted the Stagflation of the 1970's.[7]

In the 2010s[8] the slope of the Phillips curve appears to have declined and there has been controversy over the usefulness of the Phillips curve in predicting inflation. A 2022 study found that the slope of the Phillips curve is small and was small even during the early 1980s.[9] Nonetheless, the Phillips curve is still used by central banks in understanding and forecasting inflation.[10]

  1. ^ A. W. Phillips, ‘The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom 1861–1957’ (1958) 25 Economica 283, referring to unemployment and the "change of money wage rates".
  2. ^ a b Friedman, Milton (1968). "The Role of Monetary Policy". American Economic Review. 58 (1): 1–17. JSTOR 1831652.
  3. ^ a b Phelps, Edmund S. (1968). "Money-Wage Dynamics and Labor Market Equilibrium". Journal of Political Economy. 76 (S4): 678–711. doi:10.1086/259438. S2CID 154427979.
  4. ^ a b Phelps, Edmund S. (1967). "Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time". Economica. 34 (135): 254–281. doi:10.2307/2552025. JSTOR 2552025.
  5. ^ Chang, R. (1997) "Is Low Unemployment Inflationary?" Archived 2016-10-05 at the Wayback Machine Federal Reserve Bank of Atlanta Economic Review 1Q97:4-13
  6. ^ Phelan, John (23 October 2012). "Milton Friedman and the rise and fall of the Phillips Curve". thecommentator.com. Retrieved September 29, 2014.
  7. ^ Krugman, Paul R. (1995). Peddling prosperity: economic sense and nonsense in the age of diminished expectations. New York: W. W. Norton. p. 43. ISBN 978-0393312928.
  8. ^ "The Phillips curve may be broken for good". The Economist. 2017.
  9. ^ Hazell, Jonathon; Herreño, Juan; Nakamura, Emi; Steinsson, Jón (2022). "The Slope of the Phillips Curve: Evidence from U.S. States" (PDF). Quarterly Journal of Economics. 137 (3): 1299–1344. doi:10.1093/qje/qjac010.
  10. ^ "Speech by Chair Yellen on inflation, uncertainty, and monetary policy". Board of Governors of the Federal Reserve System. Retrieved 2017-09-30.