Glamor Economics

Chapter 186

Chapter 23 Section 5 Relationship Between Inflation and Unemployment—Phillips Curve

In 1954, Phillips published an article "Stabilization Policy in a Closed Economy" in the "Journal of Economics", which discussed the impact of reaction lag on macro-stabilization policy.Phillips believed that quantitative analysis should be done before making conclusions, so he started research in this area.In 1958, Phillips published the famous "Relationship between the British Unemployment Rate and the Rate of Change in Money Wages, 1861-1957" in the "Economics" magazine. The Phillips curve was first proposed in this article.

Based on the empirical statistical data of the unemployment rate and money wage change rate in the UK from 1861 to 1957, Phillips found that: the change rate of nominal wages is a decreasing function of unemployment rate; even when the growth rate of nominal wages is at the lowest normal level, the unemployment rate Still positive (Phillips's statistics are about 2% to 3%).From this he drew a curve representing the alternation between the rate of unemployment and the rate of change in money wages—this curve was the Phillips curve.

In the figure above, the horizontal axis U represents the unemployment rate, the vertical axis G represents the inflation rate, and the PC that slopes downward to the right is the Phillips curve.This curve shows that inflation (b) is low when unemployment (d) is high and inflation (a) is high when unemployment (c) is low.

Therefore, the Phillips curve has become a curve used by contemporary economists to express the alternating relationship between unemployment and inflation.

The important points of the Phillips curve can be summarized as follows: there is an alternating relationship between the unemployment rate and inflation, and the two can coexist; when the unemployment rate is the natural unemployment rate, the inflation rate is 0; according to the alternating relationship between the two, It can be applied to macroeconomic policy.

Phillips' description of the curve aroused the interest and attention of the economics circle.In the 20s, economists Samuelson and Solow deliberately used the actual materials of the United States to demonstrate the Phillips curve and found that this curve is indeed applicable.The proofs of two authoritative economists have made the Phillips curve more recognized by the academic community, and more and more people have begun to use the Phillips curve in their research.Of course, any theory proposed will be questioned.The Phillips curve is no exception.Some economists believe that the Phillips curve is only an economic model of limited applicability.They pointed out that the reason why the Phillips curve can be verified is that the data used by people are all short-term, and there may be an alternating relationship between inflation and unemployment in a relatively short period of time.In the long run, however, inflation and unemployment do not necessarily have the same relationship.Because, in the long run, this relationship will be broken sooner or later as the market structure changes.

As a result, intense discussions have been launched in the academic circles.In the 20s, the sudden high inflation rate and high unemployment rate brought unprecedented challenges to the Phillips curve.Because the situation reflected in reality is more consistent with the views of scholars who challenged the Phillips curve before.The emergence of this fact has successfully overturned the inevitability of the existence of the Phillips curve.Ultimately, most economists have to admit that the Phillips curve does need to be corrected.

But this does not negate the positive significance of the Phillips curve, at least in the short term, the Phillips curve is still applicable.Therefore, according to the relationship between the two, the government can still adopt contractionary fiscal and monetary policies when the unemployment rate is low and the inflation rate is high, exchanging a higher unemployment rate for a lower inflation rate; When the inflation rate is high and the inflation rate is low, expansionary fiscal and monetary policies are adopted to exchange a higher inflation rate for a lower unemployment rate.

In short, the proposal of the Phillips curve has provided a good solution for the government to deal with inflation and unemployment problems, and has made great contributions.

[links to related words]

Nominal Wage The wage expressed in money that a worker receives when he pays labor, that is, the money wage without price correction.Nominal wages cannot accurately reflect the actual level of wages, because nominal wages remain unchanged, and real wages can fall or rise due to price fluctuations.

Real wages refer to the amount of means of subsistence and labor services that workers can purchase with monetary wages, and it more accurately reflects the actual income level and living conditions of workers.When the prices of means of living and service charges remain unchanged, the increase in nominal wages is reflected as an increase in real wages; , real wages tend to decline.

(End of this chapter)