The Phillips curve represents the inverse relationship between inflation rate and the unemployment rate. When the unemployment was high, the inflation rate would be low; the inflation rate was high, the unemployment rate would be low. Here we have the statistics data of the inflation rate and unemployment rate from 2007-2011. On the other hand, Phillips's “curve” also represented the average relationship between unemployment and wage behavior over the business cycle. In the short run, there is a tradeoff between inflation rate and unemployment rate.
In this graph, we can see the part of the statistics date of past 5 years. In 2007, the inflation rate is only 2.01%, but we got 3.84% unemployment rate. In 2008, we have 4.32% inflation rate, which have a big increasing rate, but there is only 3.66% unemployment rate and even have drop a little. In 2009, the inflation rate is 0.52%, which is the smallest number in this graph, but we got 5.17% unemployment rate and that is the biggest number in the graph. In 2010, there is 2.39% inflation rate, it start climbing up, and 4.27 unemployment rate shows that it is turning down. And in 2011, we got 5.11% inflation rate, its keep increasing, 3.38% unemployment rate, keep decreasing, share the inverse trend with the inflation rate. Look in to all these Number; we can say the situation of this statistics is prefect match with the model of Phillips Curve in Macroeconomics.
As this kind of situation happened, one of the reasons could be the forecast error of the wages. The employees saw their money wages was up, they thing the purchase power also going up, so they are willing to supply more labor and goods. However, what they don’t know is their power of purchase has fallen, because the price, or the inflation rate has increase faster than their expected. Therefore, the next step would be the labor start to reduce the supply labor, and to keep the operation of the company, the employers need to increase the wage, to let the wages same or higher than the inflation rate, and the increasing wages will transfer to the consumer, than the inflation wage will getting higher. That’s why the inflation rate increase and the unemployment rate will come down.
The Phillips curve also is a very useful tools to the government, every years, they will spent a lot of time to think the ways to design and implementation of money policy. The government can set the policy account to the Phillips curve, such as when the unemployment rate was high; it’s used as a foundation for forecasting inﬂation, also reduce the unnatural unemployment rate of the market.
However, the Phillips curve is not always correct, in US 1973, there is a high unemployment rate and high inflation rate, the reason is they have a supply shock, everything become more and more expensive, but not increase the output. As other possible reason would be some factors such as oil prices. Another example would be in late 90s, they have low unemployment rate...