The Phillips Curve Essay

1202 words - 5 pages

The Phillips Curve

Economists agree that unemployment and inflation are two of the major
macroeconomic problems of the twentieth century. If a relationship
between the two existed then this would be a major break through for
the macro management of the economy. Phillips' work was empirical -
started with evidence and worked towards a theory. The causation for
the Phillips theory was that the level of unemployment caused the rate
of change in money wages to be what it was.

'What economic theory lies behind this?'

As unemployment decreases the available pull of labour goes down. This
means that resources become increasingly scarce and workers can push
for higher wage rates. Or as unemployment decreases more people have
more income and spend more causing Aggregate Demand to increase
leading to Demand Pull Inflation. What Phillips' curve did propose was
that an inverse relationship between unemployment and the rate of
change in money wages existed.

'As a piece of historical economic research the Phillips curve can be
seen as a success. However can it be relied upon as a piece of
economic theory?'

No one suggested that the curve should have been in a different place.
However it could have been argued that for the first period which he
studied the data, 1861 - 1913, were too unreliable. After all, for
most of that time there were no government figures for unemployment
and many politicians refused to accept that the problem existed.

'Phillips' contribution and Keynesian demand management?'

Phillips' contribution was made in the heyday of Keynesian economics.
Keynesians were in charge of economic policy and were managing the
level of demand in the economy in order to achieve full employment.
Keynesian economists all accepted that too little demand for goods and
services would result in too little demand for labour and hence
unemployment. They held that it was the government's duty to achieve
the correct level of demand by manipulating its own spending and tax
receipts, or in other words, to have an active fiscal policy. This
policy required the government to spend more than it received if the
economy had less than full employment. As a consequence, aggregate
demand would rise through a multiplier effect and unemployment would
fall.

'The inflation controversy - Demand-Pull or Cost-Push?'

Keynesian economists were divided into two camps. Some believed that
inflation was caused by too much demand for goods and services, or
excess demand i.e. Demand Pull Inflation. Such economists were very
enthusiastic about the Phillips curve because it seemed to provide
strong evidence for their views. The second camp of Keynesian
economists believed that inflation was caused by cost pressures
arising from high wage settlements gained by strong trade unions and
from increases in import prices i.e. Cost Push Inflation. They were
doubtful about the usefulness of the Phillips curve. On the

Nicholas Perry

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