Social And Employment
Is There a Trade-Off Between Jobs and Prices? Understanding the Phillips Curve
What It Is and How It Works
Some economists leave more than papers behind—they leave curves. William Phillips, an engineer-turned-economist from New Zealand, did just that. During the 1950s, he made a observation in UK data: when unemployment was low, wages increased faster. When unemployment was high, wages rose slowly or not at all.
This came to be called the Phillips Curve. The theory was straightforward: wages and prices would increase if more people were employed. If fewer people were employed, inflation would slow down. That presented governments with a choice: combat inflation or unemployment, but not both simultaneously.
Think of a line drawn with unemployment on one axis and inflation on the other—it's downward-sloping. For a time, that line felt like a reliable map to make policy.
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Why It Mattered for Policymakers
In the 1960s, many governments treated the Phillips Curve as a guide. Want more jobs? Accept a bit more inflation. Want stable prices? Accept a few more people out of work. Central banks and finance ministries used it to balance growth and price stability.
But in the 1970s, something strange happened. The world was hit by stagflation—high inflation and high unemployment at the same time. Suddenly, the curve didn’t seem so reliable. Economists realised that people adjust their behaviour based on what they expect prices to do. If they think inflation is coming, they raise wages and prices beforehand. The trade-off breaks down.
This led to new thinking. Economists like Milton Friedman argued that there’s a “natural” rate of unemployment—a level below which trying to push the economy too hard just causes inflation without reducing joblessness in the long run.
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Where It Stands Today
The Phillips Curve hasn’t disappeared but is no longer seen as a hard rule. The link between inflation and unemployment seems to hold in some places and periods. In others, it doesn’t. Many factors (from globalization to technology) affect the relationship.
Policymakers still consider the curve when making decisions, but they do so carefully. It’s one tool among many, not a magic formula. Inflation targeting, the credibility of central banks, and people's expectations now play a bigger role in how we think about inflation and unemployment.
In short, the Phillips Curve made a big splash, got challenged, and lives on today as a more flexible idea rather than a strict law.
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Real World Examples
Is the Phillips Curve Broken for Good? Some experts questioned whether the Phillips Curve was still relevant as inflation stayed low despite falling unemployment. Others argued that the relationship remained, but had weakened or changed form.