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The basics of the original Phillips Curve The essence of the Phillips Curve is that there exists a short-term trade-off between unemployment and price inflation. Why might there be a trade-off? In 1958 AW Phillips from whom the Phillips Curve takes its name plotted 95 years of data of UK wage inflation against unemployment. It seemed to suggest a short-run trade-off between unemployment and inflation. The theory behind this was fairly straightforward- falling unemployment might cause rising inflation and a fall in inflation might only be possible by allowing unemployment to rise. Therefore If Government wanted to reduce the unemployment rate, it could increase aggregate demand but, although this might temporarily increase employment, it could also have inflationary implications in both the labour and the product markets. |