Phillips Curve

Phillips curve narrative

In 1958, A W Phillips published a paper on inflation and unemployment. Phillips saw a negative relationship between the unemployment rate and inflation. Using data from the 1960’s, I have plotted the Phillips Curve seen here.

Phillips observed that when unemployment was high, inflation was low. When inflation was high, unemployment was low. This negative relationship is known as the Phillips curve.

Policymakers saw this relationship as a menu of inflation choices. Policymakers thought that they could choose to have low unemployment at the expense of inflation.


Let’s begin with the economy in long run at the natural rate of unemployment at say 6% shown as point 1. If policymakers use both Fiscal and Monetary policy to reduce the unemployment rate to 4%, resources become scarce and prices rise to point 2.

Workers will demand higher wages and the Short Run Phillips Curve will shift to the right from point 2 to point 3.

If policymakers continue to use Fiscal and Monetary policy to keep the unemployment rate below its natural rate, then inflation will continue and a wage price spiral will follow as shown a movement from point 3 to point 4.

The Phillips Curve is an empirical relationship that is observed from data. Policymakers have learned that they cannot exploit the relationship by choosing a point on the curve. The Phillips Curve is often used in introductory textbooks to explain short-term fluctuations in prices and unemployment.