What is the inflation and unemployment trade-off?
The trade-off between the rate of unemployment and the rate of inflation in an economy is also known as the Phillips curve. Stated simply, the lower the unemployment in an economy, the higher the rate of change in wages paid to labor in that economy. Incidentally, next year is the 30th anniversary of the Philips curve. In 1958, Alban William Phillips, a New Zealand-born economist, wrote his paper titled The relationship between unemployment and the rate of change of money wages in the United Kingdom 1861-1957, which was published in the quarterly journal Economica. In the paper Phillips describes how he observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined. Similar patterns were found in other countries. But this trade-off has been observed to be only in the short run. We learn more about this in the later part of the course, specifically the macroecoomics section.
