The Phillips curve shows the relationship between unemployment and inflation in an economy. Unemployment involves people who are registered as able, available and willing to work at the going wage rate but who cannot find work despite actively searching for work. Unemployment can be counted by using the claimant count which includes all those who are unemployed and actually claiming benefit in the form of Jobseekers Allowance. Inflation is a sustained increase in general price level leading to a fall in the purchasing power or value of money. Inflation is measured using either the Consumer Price index (CPI) or the Retail Price Index. This essay will consider the relationship between unemployment and inflation as depicted by the short-run Phillips curve. In addition this essay will address the possible reasons for the ‘breakdown’ of the Phillips curve in the UK during the 1970s.
The Phillips Curve devised from an observation of the relationship between the rate of unemployment and the rate of inflation in an economy. In 1958, William Phillips an economist noticed that there is an inverse relationship between money wage changes and unemployment in the British economy from 1861-1957. Minerd (2011) stated that “William Phillips published a paper describing he’s findings, and others soon found similar patterns in other countries. In 1960 Paul Samuelson and Robert Solow took Phillips' work and made the link between inflation and unemployment,” when inflation was high, unemployment was low, and vice-versa. Viewing the Phillips curve in the short run it appears to be a declining curve.
This Phillips curve shows the trade-off between higher inflation and lower unemployment. This Phillips curve shows the trade-off between higher inflation and lower unemployment.
In the short run an increase in money will result into more spending, which raises both prices and production. The...