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What is a “Phillips Curve”?

The Phillips Curve is named after an economist named A. W. Phillips, who in 1958 published an article in which he showed a relationship between the level of unemployment and the rate of change in wages. In simple terms, his theory suggested that wage or price increases lower the level of unemployment or in other words, that the policies leading to inflation also lead to lower levels of unemployment.

This suggests that having a low unemployment rate and a low rate of inflation at the same time is inconsistent, and that there is some level of unemployment below which inflation begins to rise. The reality has sometimes been different. In the early 1970s, high inflation and high unemployment went hand in hand, which would seem to disprove Phillips’ idea. More recent economic writing has cast doubt on the trade-off between inflation and unemployment, and in fact has concluded that in the long run, there is no trade-off between inflation and unemployment.