phlips curve

1. How Inflation and Unemployment
are related
By
Alok Upadhayay

2. 
 Inflation & unemployment are the most economic
variables that affect us in our daily life
 Inverse correlation between inflation & unemployment
 Based on the fundamental principle of demand & supply
 Inflation ought to be low when unemployment is high,
and vice versa
 If demand for labor exceeds supply of labor leads to rising
wage inflation and vice versa
Relationship between inflation and
unemployment

3. 
 A.W. philips , first economist who found inverse
relationship between inflation and unemployment.
 Philip hypothesized that if demand for labor is high ,
employers expected to bid wages up rapidly.
 Relationship between unemployment & rate of
change of wages was highly non linear.
 The curve depicting the relationship between general
price inflation rather than wage inflation &
unemployment came to be known as ‘philips curve’
Philips curve

4.  low inflation and full employment are the cornerstone
of monetary policy.
 Philip curves could be used to fine tune monetary or
fiscal policy to meet desired economic outcomes.
 To aim for a balance between desired level of inflation
& unemployment.
 A lower unemployment rate could be maintained
indefinitely as long as a higher inflation rate could be
tolerated.
Implication of philips curve

5. 
 Group of economists who were Staunch, Monetarists, led
by Milton Friedmand & Edmund Phelps.
 They argued that the Philips curve does not apply over
the long term.
 Consider a scenario in which the natural rate of
unemployment is prevalent.
 Natural rate of unemployment is not a static number but
changes over time due to the influence of a number of
factors.
 Friedman & Phelps finding gave rise to the distinction
between the short run long run.
Manetarists rebuttal

6. 
 The Philips curve works well in the short run.
 It is appropriate when inflation is fairly constant.
 It does not hold up over the long run since the economy
reverts to the natural rate of unemployment as it adjust to
any rate of inflation.
 The relationship between inflation & unemployment has
broken down in period of stagflationary 1970s & the
booming 1990s.
 The tradeoff between inflation & unemployment only
work as a temporary measured and is not a universal
panacea available to plicymakers.
The bottom line