The Phillips curve

1958

Economics — the supposed trade-off between inflation and unemployment

The relationship, plotted from nearly a century of British data in 1958, between unemployment and the rate at which money wages rise: the fewer people out of work, the faster wages climb. Restated in terms of prices, it was read in the 1960s as a menu of choices for governments — accept a little more inflation and buy a little less unemployment. Milton Friedman and Edmund Phelps argued in 1967–68 that any such trade-off lasts only as long as people are surprised, and that in the long run the relation is vertical; the stagflation of the 1970s was widely taken to prove them right. The short-run relation survives in modified, expectations-augmented form and remains one of the most argued-over objects in macroeconomics.

How to spot them

▸A downward-sloping scatter of British data from 1861 to 1957, wages on one axis and unemployment on the other
▸Its author was a New Zealander at the LSE who had trained as an electrical engineer
▸The 'menu of choices' reading of 1960, and the vertical long-run version of 1968
▸A machine of perspex tanks and coloured water, modelling the economy as plumbing

Key facts

A 1958 article in Economica plotting British wage rises against unemployment from 1861 to 1957 (1958)

'The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957'

Samuelson and Solow's 1960 restatement in terms of prices, offering governments a 'menu of choices' (1960)

The version policy-makers actually used, and the one the 1970s discredited

Friedman and Phelps argued in 1967–68 that the trade-off vanishes once expectations adjust (1968)

The expectations-augmented version; the long-run relation is vertical at the natural rate

High unemployment and high inflation together through the 1970s, which the simple version said was impossible (1970s)

The oil shocks of 1973 and 1979 and the collapse of the simple trade-off

A machine of perspex tanks and pumps built in 1949, in which coloured water stood for money flowing round the economy (1949)

The MONIAC, built by the same New Zealander; surviving examples are in the Science Museum and in Cambridge

NAIRU — the rate of unemployment consistent with inflation neither rising nor falling

The modern operational form of the vertical long-run relation

Its apparent flattening since the 1990s, so that slack in the labour market seems to move prices much less

One of the central puzzles of modern macroeconomics, revisited after the 2021–23 inflation surge

Key ideas

The original finding was about money wages, not prices. Turning it into a statement about inflation required the extra assumption that firms set prices as a mark-up over wages.
The expectations-augmented form says inflation equals expected inflation plus a term in the gap between actual and natural unemployment, plus supply shocks. If expectations catch up fully, only surprises move unemployment.
The policy implication is credibility: a central bank that is believed can disinflate cheaply, because expectations fall without a deep recession. A central bank that is not believed pays in lost output — the 'sacrifice ratio'.
The evidence is genuinely mixed. The relation is clear in high-inflation episodes and in cross-country data, faint in low-inflation rich economies since the 1990s, and appeared to steepen again when inflation rose sharply after 2021.

Quick-fire facts

•A. W. H. 'Bill' Phillips (1914–1975) was born in New Zealand, trained as an electrical engineer, and taught at the London School of Economics
•His paper appeared in Economica in 1958 and used British data from 1861 to 1957
•Paul Samuelson and Robert Solow restated it in price terms in 1960 and coined the 'menu of choices' reading
•Milton Friedman's 1967 AEA address and Edmund Phelps's contemporaneous work introduced the expectations-augmented version
•Phillips built the MONIAC hydraulic computer in 1949 while a student, using parts said to include a bomber's wartime components
•He was captured by the Japanese in Java in 1942 and spent the war as a prisoner, learning Chinese in captivity and being appointed MBE for his conduct
•The acronym NAIRU stands for the non-accelerating inflation rate of unemployment
•Phillips suffered a stroke in 1969, returned to New Zealand, and died in Auckland in 1975
•Irving Fisher had described a similar relation in a 1926 paper, sometimes jokingly called 'the Fisher curve'

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Sources

A. W. H. Phillips — The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957 Economica, vol. 25, 1958. Cited without URL.
Milton Friedman — The Role of Monetary Policy American Economic Review, March 1968; the expectations-augmented critique. Cited without URL.