Philips curve
![philips curve philips curve](https://equitablegrowth.org/wp-content/uploads/2016/01/Untitled-768x464.png)
If the government increases government spending, the growth that it generates will increase the demand for labor, thereby lowering the unemployment rate. Therefore, the effect of the increase in the unemployment rate on inflation is predictable. If the unemployment rate rises to 6%, the inflation rate will rise to 3% and so on. The Phillips curve suggests that if the unemployment rate is 5%, then the inflation rate will be 2.5%. The opposite correlation between unemployment and inflation is portrayed as a downward sloping curve. When more money is flowing into the economy, consumer spending increases, thereby increasing the profitability of firms and lowering the unemployment rate.
![philips curve philips curve](https://opentextbc.ca/principlesofeconomics/wp-content/uploads/sites/149/2016/04/CNX_Econ_C25_006.jpg)
This happens because the monetary policies that the governments are employing to increase the inflow of money in the economy cause the inflation to rise, but, at the same time, they increase employment through the creation of more jobs. According to the Phillips curve, the highest levels of employment are attainable only when the inflation rate is high. What is the definition of Phillips curve? As an economy grows, so does inflation, which eventually leads to the creation of more jobs, thereby lowering the unemployment rate. Phillips, who introduced the concept, unemployment and inflation are negatively correlated. See OPTIMIZING, FIXED TARGETS, NEW AND OLD PARADIGM ECONOMICS.Definition: The Phillips curve is an economic concept that holds that a change in the unemployment rate in an economy causes a direct change in the inflation rate and vice versa. The explanation for this, it is suggested, is because of greater labour market flexibility, which has reduced ‘the natural rate of unemployment’ (to point Y in the figure) while a more stable monetary climate, through the government's commitment to an inflation rate target of no more than 2%, has reduced inflationary expectations. the Phillips curve has shifted inwards towards the origin and become less steep (Phillips curve 2 in Fig. More recently, the UK economy has experienced both lower unemployment and lower inflation, i.e. See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE. This led to attempts to reformulate the Phillips curve to allow, for example, for the effect of price expectations on money wage increases. However, while there was strong empirical support for the Phillips curve relationship in the past, in the 1980s high unemployment and high inflation tended to co-exist (see STAGFLATION). The ‘curve’ thus suggests that there is an inverse relationship (a ‘trade-off) between unemployment and DEMAND-PULL INFLATION. By contrast, rising unemployment and falling demand lead to a slowing down in the rate of increase of money wages. 142), resulting from an increase in the level of AGGREGATE DEMAND, brings about an acceleration in the rate of increase of money wages (from C to D), reflecting employers’ greater willingness to grant wage increases as the demand for their products expands. Let us assume that initially the current rate of unemployment is A and that the current rate of inflation is C.Ī fall in unemployment (from A to B in Fig. At levels of unemployment below point X, the inflation rate then starts to increase.
![philips curve philips curve](https://www.econlib.org/library/Enc/art/lfHendersonCEE2_figure_037.jpg)
Point X, where the Phillips curve intersects the horizontal axis, is the rate of unemployment consistent with stable prices - the so-called ‘non-accelerating inflation rate of unemployment’ (NAIRU), also referred to as the ‘NATURAL RATE OF UNEMPLOYMENT’. The figure depicts an initial Phillips curve 1. 142 shows the rate of change of money wages/rate of inflation on the vertical axis and the rate of unemployment on the horizontal axis. Phillips) of the relationship between the level of UNEMPLOYMENT and the rate of change of MONEY WAGES and, by inference, the rate of change of prices ( INFLATION). Phillips curve a curve depicting an empirical observation (based on the work of the British economist A.