PHILLIPS CURVE

Phillips curve graphic representation of the economic relationship between the rate of unemployment (or the rate of change of unemployment) and the rate of change of money wages. It indicates that wages tend to rise faster when unemployment is low. In his original article (1958), A.W. Phillips plotted the unemployment rates and the rates of change of money wages for the U.K. from 1861 to 1957. He found that, except for the years of unusually large and rapid increases in import prices, the rate of change in money wages could be explained by the level of unemployment. As traditional economic theory would predict, in times with low rates of unemployment employers are more likely to bid wages up in an effort to lure the higher quality employees away from their competitors. When unemployment rates are high, such bidding is unnecessary and the rate of change in money wages is lower. The main implication of the Phillips curve is that, because a particular level of unemployment implies a particular rate of wage increase, the aims of low unemployment and a low rate of inflation may be inconsistent. In recent years, however, the relation between unemployment and inflation has been too unstable, most observers would argue, to make much use of the Phillips curve concept. In particular, the situation in the early 1970s, with both relatively high unemployment and extremely high wage increases in most countries, represented a point well off the Phillips curve.