Phillips curve

The Phillips curve was constructed by A. W. Phillips and published in 1958. The Phillips curve shows the relationship between unemployment and inflation.

The Phillips curve is based on observations of inflation and unemployment during 1861 to 1957 in England. The observations were knit together in a graph showing the relationship between unemployment and inflation. The Phillips curve shows that a low unemployment rate means high inflation and that high unemployment implies low inflation. Unemployment can, according to the Phillips curve, be pushed back at the cost of higher inflation. Hansen and Rehn (1954) also studied the relationship between unemployment and inflation, and they got the same results as Phillips in the short term.

In the long term however, there is a limit to how much unemployment can be pushed back. There is a natural unemployment that never can be pushed back, this limit was described with NAIRU (Long-term Phillips curve). An attempt to push unemployment below the natural rate of unemployment will lead to sharply higher inflation and may lead to increased unemployment.