Phillips Curve

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

A. W. Phillips trained as an engineer before he became an economist, and it shows in how he approached his most famous paper. In 1958, he plotted British unemployment against the rate of change of money wages across nearly a hundred years, from 1861 to 1957, and found a strikingly consistent inverse relationship: years of low unemployment were years of rising wages, and years of high unemployment were years of flat or falling wages. He offered no grand theory to explain it, only the pattern in the data itself. Economists quickly relabeled the relationship in terms of price inflation rather than wage inflation and renamed it the Phillips Curve, and within a few years, Keynesian policymakers on both sides of the Atlantic began treating it as a menu, a government could choose a point on the curve, accepting a little more inflation to buy a little less unemployment, or the reverse. That confident reading did not survive the following decade intact, but Phillips's original contribution, a careful empirical regularity found in a century of real wage data, remains one of the most cited findings in the history of macroeconomics, however the theoretical debate over what causes it has since evolved.

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

By the late 1960s, governments across the developed world had spent a decade treating the Phillips Curve as a dial they could turn, choosing a little more inflation in exchange for a little less unemployment. In his 1968 presidential address to the American Economic Association, Milton Friedman argued the dial was an illusion. His reasoning turned on expectations: the original trade-off worked, he argued, only because workers and firms were repeatedly surprised by inflation they had not anticipated when they set wages and prices. Surprise inflation temporarily makes real wages look lower to employers, so they hire more, unemployment falls, but once workers and firms come to expect the going rate of inflation and build it into their wage bargains, the same nominal inflation no longer fools anyone and unemployment reverts to what Friedman called its natural rate, the rate consistent with the economy's underlying structure regardless of the inflation rate. Edmund Phelps developed a closely related argument at nearly the same time. The prediction was tested within a decade: the stagflation of the 1970s, simultaneous high inflation and high unemployment, was exactly the kind of outcome the original stable Phillips Curve said should not happen, and it reshaped how central banks think about the limits of demand management ever since.