Phillips Curve

Definition

A relationship, first observed by economist A. W. Phillips, showing an inverse short-run trade-off between the rate of unemployment and the rate of inflation: lower unemployment tends to come with higher inflation, and vice versa.

Key points

• The idea: when unemployment is low, labour is scarce, wages and prices rise, so inflation goes up; when unemployment is high, inflation tends to fall.
• It implies policymakers face a short-run choice between fighting inflation and fighting unemployment.
• The original curve broke down in the 1970s stagflation, when high inflation and high unemployment occurred together; see concept types of inflation.
• Economists later argued there is no long-run trade-off: in the long run the economy returns to a "natural rate" of unemployment regardless of inflation (the expectations-augmented view).
• It links to the concept laffer curve and concept kuznets curve as named curves frequently asked together.

Why it matters for CAPF

The inverse inflation-unemployment trade-off and the name A. W. Phillips are testable named-concept facts, often grouped with other economic curves.

Common confusion

The Phillips curve (inflation versus unemployment trade-off) is different from the Laffer curve (tax rate versus revenue) and the Kuznets curve (inequality versus growth); the trade-off holds in the short run, not the long run.

Parent note

inflation and prices