Page 209 - DECO402_Macro Economics

Macroeconomic Theory Tanima Dutta, Lovely Professional University

Notes Unit-23: Phillips Curve Analysis

Contents
Objectives
Introduction
23.1 The Phillips Curve: Relation between Unemployment and Inflation
23.2 Friedman’s View: The Long-run Phillips Curve
23.3 Rational Expectations and the Phillips Curve
23.4 Implications of the Phillips Curve Policy
23.5 Summary
23.6 Keywords
23.7 Review Questions
23.8 Further Readings

Objectives

After studying this unit, students will be able to:
y Know the relation between unemployment and inflation,
y Know the Long term Phillips Curve,
y Know the Rational Expectation and Phillips Curve.

Introduction
Many economists have extended the Phillips analysis till the situation of trade-off between rate of
unemployment and rate of change in price level or inflation rate. They take this assumption that
when wages will increase faster than labour productivity, then prices will change. If rate of increase of
monetary wages is more than the rate of increase of labour productivity, then price will rise and vice
versa. But if labour productivity rate increases equal to money wage rates then prices will not rise.

23.1 The Phillips Curve: Relation between Unemployment and Inflation

Phillips curve investigates relation between rate of unemployment and rate of change in money
wages. England’s economist A. W. Phillips had first recognised it that is why it is known as Phillips
Curve. This curve tells that there is an inverse relation between rate of unemployment and rate of
increase of money wages. By basing his analysis on the data of England he presented this experience
born inference that when unemployment is too much then rate of increase in money wages is low. It
happens because, “when demand for labour is less and unemployment more, then, labours do not
agree to render their services at less than the current rates”. As opposed to this, when unemployment
is less then rate of increase in money wage rate is high. Its cause is this that, “When demand for labour
is more and unemployment is very less, then we must hope that masters will increase the wages very
often.”

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