What is the relationship between inflation and unemployment according to the Phillips Curve? Do real-world experiences support it?
Answer (1)
The Phillips Curve suggests that there is a trade-off between inflation and unemployment: when inflation is high, unemployment is low, and vice versa. The idea is that when more people have jobs and earn money, they spend more, which causes prices to rise. On the other hand, when unemployment is high, people spend less, and inflation slows down.However, this relationship doesn’t always hold true in the real world. For example, during the 1970s stagflation, many countries, including the U.S., experienced high inflation and high unemployment at the same time. In the Philippines, there have also been periods when both inflation and joblessness were rising, such as during the COVID-19 pandemic, when supply issues pushed prices up even as many people lost their jobs.This situation challenged the original Phillips Curve model. Economists like Milton Friedman and Edmund Phelps argued that the trade-off only works in the short run. In the long run, people adjust their behavior and expectations. If inflation stays high, workers demand higher wages, and businesses raise prices, so the benefit of lower unemployment disappears.Today, economists believe the Phillips Curve only works temporarily. If inflation expectations are low and stable, then inflation and unemployment may move in opposite directions for a while. But if expectations rise, the trade-off breaks down.In conclusion, while the Phillips Curve helps explain short-term changes in inflation and unemployment, real-life events show that other factors like expectations, shocks, and government policy can affect the outcome. So, it’s a helpful tool, but not a perfect one.
