Phillips Curve - Is Unemployment Inflated? [Virtual Economy]

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Unemployment Theories - Phillips Curve - Is unemployment inflated?

The Phillips Curve was a relationship between unemployment and inflation discovered by Professor A.W. Phillips. The relationship was based on observations he made of unemployment and changes in wage levels from 1861 to 1957. He found that there was a trade-off between unemployment and inflation, so that any attempt by governments to reduce unemployment was likely to lead to increased inflation. This relationship was seen by Keynesians as a justification of their policies.

The curve sloped down from left to right and seemed to offer policymakers a simple choice - you have to accept inflation or unemployment. You can't lower both.

Phillips Curve

However, in the 1970s, the curve began to break down as the economy suffered from unemployment and inflation rising together (stagflation). This caused the government many problems and economists struggled to explain the situation. One of the most convincing explanations came from Milton Friedman - a Monetarist economist. He developed a variation on the original Phillips Curve called the expectations-augmented Phillips Curve Look up Expectations-augmented Phillips Curve in glossary . There is a lot more detail on this in the Monetarist section of the Library - look under Monetarist theories.

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