Abstract
Is the Phillips curve dead, or simply dormant? The Phillips curve traces out the relationship between the degree of slack in the labour market (unemployment) and the rate of change in wages, and hence in prices. After nearly a century in which this relationship held well (1870–1960), it broke down in the 1970s as both unemployment and inflation rose (stagflation), owing to a failure to take proper account of expectations of future inflation. More recently, the relationship has again puzzled economists, since inflation has remained quite steady and low despite large swings in unemployment, up in 2009/2010 and down since then. Goodhart and Pradhan discuss six possible (partial) explanations, which are:
-
i.
The Phillips curve is defunct;
-
ii.
Expectations are all that matter;
-
iii.
Successful monetary policies;
-
iv.
A changing structure of employment;
-
v.
Growing weight on global factors;
-
vi.
A shifting NRU.
The final explanation, mostly ignored in the conventional analysis thus far, likely explains more of the Phillips curve puzzle than the rest in their view.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
There are some technical distinctions between the NAIRU and NRU, but only the cognoscenti are concerned with them.
- 2.
Or somewhat back-bending, owing to the use of effort and resources to escape the ravages of higher-level inflation, e.g. on taxation.
- 3.
As always, there are qualifications, for example hysteresis, whereby the short-run can affect the long-run equilibrium.
- 4.
Economists such as Dennis Robertson and Paish were then widely excoriated for suggesting that equilibrium might require an average unemployment rate above 2%, e.g. Robertson (1959).
N.B. The idea that there could be an equilibrium rate of unemployment, and that expectations mattered, had been voiced long before Friedman/Phelps. But the narrative seemed less compelling then.
- 5.
Owing to lags in the transmission mechanism between policy measures and their effect on wage/price inflation, unforeseen deviations between (official) forecasts of unemployment and inflation and actual, ex post, inflation might help to identify the underlying structural relationship.
- 6.
While this does seem to hold for the wage/unemployment version of the Phillips curve, attempts to resurrect the price/output gap formulation of this relationship have been rather less successful. What has caused this divergence, e.g. time varying profit mark-ups, is beyond the scope of this work.
- 7.
From Wikipedia, https://en.wikipedia.org/wiki/Reserve_army_of_labour,
Although the idea of the industrial reserve army of labour is closely associated with Marx, it was already in circulation in the British labour movement by the 1830s. Engels discussed the reserve army of labour before Marx did in Engels famous book (2018), The Condition of the Working Class in England (1845). The first mention of the reserve army of labour in Marx’s writing occurs in a manuscript [on ‘Wages’] he wrote in 1847, but did not publish….
The idea of the labour force as an “army” occurs also in Part 1 of The Communist Manifesto , written by Marx and Engels in 1848. (see Engels and Marx 2018)
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2020 The Author(s)
About this chapter
Cite this chapter
Goodhart, C., Pradhan, M. (2020). The Phillips Curve. In: The Great Demographic Reversal. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-42657-6_8
Download citation
DOI: https://doi.org/10.1007/978-3-030-42657-6_8
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-42656-9
Online ISBN: 978-3-030-42657-6
eBook Packages: Economics and FinanceEconomics and Finance (R0)