Phillips curve
Economic model relating wages to unemployment / From Wikipedia, the free encyclopedia
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The Phillips curve is an economic model, named after Bill Phillips, that correlates reduced unemployment with increasing wages in an economy.[1] While Phillips did not directly link employment and inflation, this was a trivial deduction from his statistical findings. Paul Samuelson and Robert Solow made the connection explicit and subsequently Milton Friedman[2] and Edmund Phelps[3][4] put the theoretical structure in place.
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While there is a short-run tradeoff between unemployment and inflation, it has not been observed in the long run.[5] In 1967 and 1968, Friedman and Phelps asserted that the Phillips curve was only applicable in the short run and that, in the long run, inflationary policies would not decrease unemployment.[2][3][4][6] Friedman correctly predicted the Stagflation of the 1970's.[7]
In the 2010s[8] the slope of the Phillips curve appears to have declined and there has been controversy over the usefulness of the Phillips curve in predicting inflation. A 2022 study found that the slope of the Phillips curve is small and was small even during the early 1980s.[9] Nonetheless, the Phillips curve is still used by central banks in understanding and forecasting inflation.[10]