Phillips Curve

The Phillips Curve originates in a 1958 paper by New Zealand economist A.W. Phillips, published in Economica, which plotted UK wage inflation against unemployment from 1861 to 1957 and found a stable negative correlation. Paul Samuelson and Robert Solow adapted the relationship for the United States in a 1960 American Economic Review paper, reframing it in terms of price inflation rather than wages and suggesting policymakers faced a menu of inflation-unemployment trade-offs.

The simple trade-off broke down in the 1970s, when many advanced economies experienced stagflation—simultaneously high inflation and high unemployment—particularly after the 1973 OPEC oil shock. Milton Friedman (in his 1967 AEA presidential address, published 1968) and Edmund Phelps had already argued that any trade-off was temporary. They introduced the expectations-augmented Phillips Curve, in which workers and firms adjust their inflation expectations, so that in the long run unemployment returns to a "natural rate" (later formalised as the NAIRU, the non-accelerating inflation rate of unemployment) regardless of the inflation rate. The long-run curve is therefore vertical.

Modern macroeconomics typically uses a New Keynesian Phillips Curve, derived from microfoundations with sticky prices (e.g., the Calvo pricing model), in which current inflation depends on expected future inflation and a measure of economic slack such as the output gap or marginal cost.

For policy researchers, the Phillips Curve underpins central-bank reasoning at institutions like the US Federal Reserve and the European Central Bank: tightening monetary policy to cool labour markets is expected to reduce inflation, while loosening policy when unemployment is above the NAIRU should not be inflationary. Its empirical flatness since the 1990s—inflation appearing less responsive to unemployment—has been widely debated, including in speeches by former Fed Chair Janet Yellen and in IMF World Economic Outlook analyses.