Introduction to Phillips Curve
According to economist A. W. Phillips, there is a relationship between unemployment and inflation, and that it is inverse in nature. When plotting a graph for it, which is called the Phillips Curve, the higher the rate of inflation, the lower the rate of unemployment in the economy and vice versa. Since the 1970s though, this theory has been debatable.
Understanding Phillips Curve
Phillips curve seeks to point the relation between inflation and unemployment, inferring that during a period of economic growth, inflation will rise that can be justified with the rise in employment due to increase in people’s purchasing power. That in such a period, unemployment should decrease with increase in inflation. That the change in unemployment is essential to price inflation, its increase or decrease.
- The graph depicts a downward sloping, concave curve that shows the inverse relationship between inflation on the Y-Axis and unemployment on the X-Axis.
- The concept behind the graph is that when governments increase their public expenditure to create jobs, the workers will be able to earn a more despicable income that increases their spending. The wages will also rise, because the cost of production is rising, and as such the prices will also rise.
- Phillips Curve has seen its demerits, theoretically and in real life during the stagflation period of the 19070s. It was a time when inflation was high, but unemployment was equally high. It came to light then that the Phillips Curve works for a short term but is an inadequate measure for a long term.
- The curve is also very one-dimensional, working under the assumption that wages are the only thing that affect the cost of production in the factory, that the effect of prices on those wages is nonexistent.
Highlights of Phillips Curve
The reason why Phillips Curve works only for the short run is the expectation that the curve can only last for a specific short period of time, where consumers fit into the assumptions of the curve. In the long run, workers and consumers shift and adapt their consuming habits that will not stand in the long run.
