Phillips curve

The Phillips curve is a representation of the relationship between unemployment and inflation in the macroeconomy, where a tradeoff between low unemployment and price stability exists. Identified by economist Bill Phillips, the curve shows a relationship between lowering unemployment with increasing wages in an economy. While Phillips did not directly link employment and inflation, this was a trivial deduction from his statistical findings. Classical economists Paul Samuelson and Robert Solow made the connection explicit, followed by the theoretical arguments developed by Milton Friedman and Edmund Phelps. While there is a short-run tradeoff between unemployment and inflation, as of 1997 it had not been observed in the long run. In 1967 and 1968, Friedman and Phelps asserted that the Phillips curve was only applicable in the short run and that, in the long run, inflationary policies would not decrease unemployment. Friedman correctly predicted the stagflation of the 1970s. In the 2010s the slope of the Phillips curve appears to have declined and there has been controversy over the usefulness of the Phillips curve in predicting inflation. A 2022 study found that the slope of the Phillips curve is small and was small even during the early 1980s. Nonetheless, the Phillips curve is still used by central banks in understanding and forecasting inflation.