The 1960s, and especially the 1970s, provided economists with numerous new data points that did not fall along the old Phillips curves for the industrialized countries but rather were well to the right of the older data points on the graph. In the new era, higher rates of inflation coexisted everywhere with unexpectedly high rates of unemployment . It seemed to require higher and higher doses of inflation than before to bring unemployment down to any given level.
More recent economic analysis of the trade-off between inflation and unemployment considerably modifies the simplistic stable Phillips curve theory of the past. It is now recognized that both labor and management incorporate their expectations about the likely future rate of inflation into their bargaining positions in wage negotiations, since it is the real purchasing power of the future wage payments rather than simply the nominal number of currency units that matter to them. As average inflation rates in the industrial countries rose over time, labor and management eventually began adjusting their inflationary expectations for the future upward as well, and wage settlements began to reflect these higher long-term expectations. As a result, the Phillips curve shifts upward and outward to a higher level, further away from the origin of the graph. Government policy makers now can lower unemployment rates (in the short to medium term) only by creating a rate of inflation even more rapid than the public previously had come to expect -- and this works for only so long as it takes the public to adjust their expectations upward in the light of their new experiences.
[See also: inflation , unemployment rate , macroeconomics , trade-off , monetary policy , fiscal policy , trade-off , business cycle ]