Phillips Curve

Published Jan 10, 2023

Definition of Phillips Curve

The Phillips curve is an economic concept that describes the relationship between inflation and unemployment. It states that there is an inverse relationship between the two, meaning that when one goes up, the other goes down. That means when unemployment is low, inflation tends to be high, and vice versa.

The Phillips curve was developed by and named after economist William Phillips. Although it was widely used by policymakers in the 20th century, it has become increasingly disputed, especially since the occurrence of stagflation in the 1970s (which somewhat disproved the concept).

Example

To illustrate this concept, let’s look at the US economy in 1960. At that time, the unemployment rate was rather high, at around 6.6%. At the same time, inflation was rather low, at around 1.72%. Now, let’s fast forward to theyear 2000. At that time, the unemployment rate was lower, at around 3.9%. At the same time, inflation was higher, at around 3.4%. (data by the U.S. Bureau of Labor Statistics, curated by the balance) This could be used as an example of the Phillips curve in action.

Why Phillips Curve Matters

The Phillips curve used to be an important concept for policymakers throughout the 20th century. It guided macroeconomic decision-making by looking at the trade-off between inflation and unemployment. That means it was used to evaluate the effects of policies on the economy. If the government wanted to reduce unemployment, it would have used fiscal policy to stimulate the economy and raise the inflation rate.

However, the concept has lost most of its significance since the occurrence of stagflation in the 1970s, which somewhat disproved Phillip’s theory.