Let's Break It Down - The Phillips Curve

Introduction

Can a country have low unemployment and low inflation at the same time? For decades, economists have debated this question using an idea called the Phillips curve.

What Is the Phillips Curve?

In 1958, economist A.W. Phillips noticed that when unemployment in the United Kingdom was low, wages tended to rise faster. Later economists extended this idea to inflation. The Phillips curve suggests a trade-off: lower unemployment comes with higher inflation, and higher unemployment comes with lower inflation.

Why the Trade-Off Exists

When unemployment is low, businesses compete harder for workers and raise wages. Higher wages increase costs, and companies may raise prices. When many people are unemployed, workers have less bargaining power, and inflation tends to slow.

Does It Still Work?

The relationship has not always held up. In the 1970s, the United States experienced high inflation and high unemployment at the same time, called stagflation. In the late 2010s, unemployment fell very low without much inflation. Economists now believe expectations about inflation play a big role. The Federal Reserve still watches this relationship when setting interest rates.

Conclusion

The Phillips curve shows how difficult it is to balance jobs and prices. It remains one of the most debated ideas in economics today!