The Discovery of the Phillips Curve
The Discovery of the Phillips Curve
In the 1950s, A.W. Phillips, an economist at the London School of Economics, was studying the Keynesian analytical framework. The Keynesian theory implied that during a recession inflationary pressures are low, but when the level of output is at or even pushing beyond potential GDP, the economy is at greater risk for inflation. Phillips analyzed 60 years of British data and did find that tradeoff between unemployment and inflation, which became known as a Phillips curve. This figure shows a theoretical Phillips curve, and the following Work It Out feature shows how the pattern appears for the United States.
A Keynesian Phillips Curve Tradeoff between Unemployment and Inflation
A Phillips curve illustrates a tradeoff between the unemployment rate and the inflation rate; if one is higher, the other must be lower. For example, point A illustrates an inflation rate of 5% and an unemployment rate of 4%. If the government attempts to reduce inflation to 2%, then it will experience a rise in unemployment to 7%, as shown at point B.
The Phillips Curve for the United States
Step 1. Go to this website to see the 2005 Economic Report of the President.
Step 2. Scroll down and locate Table B-63 in the Appendices. This table is titled “Changes in special consumer price indexes, 1960–2004.”
Step 3. Download the table in Excel by selecting the XLS option and then selecting the location in which to save the file.
Step 4. Open the downloaded Excel file.
Step 5. View the third column (labeled “Year to year”). This is the inflation rate, measured by the percentage change in the Consumer Price Index.
Step 6. Return to the website and scroll to locate the Appendix Table B-42 “Civilian unemployment rate, 1959–2004.
Step 7. Download the table in Excel.
Step 8. Open the downloaded Excel file and view the second column. This is the overall unemployment rate.
Step 9. Using the data available from these two tables, plot the Phillips curve for 1960–69, with unemployment rate on the x-axis and the inflation rate on the y-axis. Your graph should look like this figure.
The Phillips Curve from 1960–1969
This chart shows the negative relationship between unemployment and inflation.
Step 10. Plot the Phillips curve for 1960–1979. What does the graph look like? Do you still see the tradeoff between inflation and unemployment? Your graph should look like this figure.
U.S. Phillips Curve, 1960–1979
The tradeoff between unemployment and inflation appeared to break down during the 1970s as the Phillips Curve shifted out to the right.
Over this longer period of time, the Phillips curve appears to have shifted out. There is no tradeoff any more.
This lesson is part of:
The Keynesian Perspective