Phillips curve

In a famous article on ‘The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957’, published in the journal Economica (1958), the economist A. W. Phillips argued that an inverse relationship existed between unemployment and wage inflation in the UK throughout the period in question. The rate of change in money wages tended to be high in conditions of low unemployment and low (or even negative) when unemployment was high. Thus, the so-called Phillips curve suggested that maintenance of full employment would necessarily involve some inflation, whereas inflation was only likely to be reduced by an increase in unemployment. This belief informed much economic discussion, and formed part of the accepted wisdom that provided the backdrop to policy-making throughout the two decades that followed, since it suggested that it was possible to calculate the terms of the trade-off between the policy objectives of full employment and zero inflation. However, the statistical association at the core of the argument clearly broke down (in Britain and elsewhere) during the 1970s, and its interpretation was challenged by the rise of monetarist explanations of inflation and unemployment.