Background
The Phillips Curve, initially conceived by A. W. Phillips in 1958, illustrates an inverse relationship between the rate of unemployment and the rate of inflation within an economy. While the original concept dealt primarily with the short-term horizon, economists have since expanded it to consider long-term dynamics—the long-run Phillips curve.
Historical Context
The idea originated to empirically showcase a trade-off between inflation and unemployment. By analyzing historical data from the United Kingdom, Phillips observed a clear inverse relationship between wage inflation and unemployment, leading to further development by other economists who adapted the model to include price inflation. Over time, as policy environments and macroeconomic understanding evolved, the limitations of the original short-term depiction led to the development of a long-run framework.
Definitions and Concepts
The long-run Phillips curve represents the relationship between inflation and unemployment when expectations are fully adjusted. It assumes that, in the long run, actual inflation equals expected inflation. This can reflect processes such as the adaptation of inflationary expectations by workers, firms, and policymakers.
The long-run Phillips curve contrasts with the short-term curve by indicating differing elasticities of inflation and unemployment, depending on whether or not anticipations of inflation have been fully integrated into decision-making processes.
Major Analytical Frameworks
Classical Economics
In classical economics, real variables (like output and unemployment) are determined independently of monetary variables (like inflation). The long-run analysis considers that in equilibrium, money is neutral, leading to a vertical long-run Phillips Curve at the natural rate of unemployment, assuming prices and wages are perfectly flexible.
Neoclassical Economics
The neoclassical perspective incorporates the concept of natural unemployment or NAIRU (Non-Accelerating Inflation Rate of Unemployment). According to this school, the economy self-corrects to this natural rate in the long run and the long-run Phillips curve is vertical at the NAIRU.
Keynesian Economics
Keynesians may argue for the importance of wage-price rigidity and imperfect information which could imply a non-vertical long-run Phillips curve in some conditions. Despite this, Neo-Keynesians still recognize the emphasis on inflation expectations aligning with long-term realities.
Marxian Economics
Marxian economics, focusing more on class struggle and capital dynamics, might interpret the Phillips Curve through labor relations, offering an alternative view. This perspective suggests that structural changes in the economy influence the trade-offs between inflation and employment.
Institutional Economics
Institutional economists consider the roles of institutions, norms, and rules, emphasizing how long-run dynamics can be shaped by institutional contexts, thereby potentially influencing the shape of the long-run Phillips Curve based on institutional rigidity or flexibility.
Behavioral Economics
Behavioral economics, focusing on psychological and irrational behaviors, might challenge conventional assumptions about full adjustability of expectations, suggesting that the adaptive behaviors of agents could create a more complex dynamic for the long-run curve.
Post-Keynesian Economics
Post-Keynesians emphasize fundamental uncertainty and non-neutral money, questioning the consistency of a vertical long-run Phillips curve while considering financial markets and distributive impacts more critically.
Austrian Economics
Austrians, with their focus on time preferences and the heterogeneity of capital, would argue that interventions (like monetary policy attempting to exploit the Phillips curve’s trade-offs) lead to malinvestments, thereby affecting the long-term economic structure and invalidating stable long-run relationships.
Development Economics
From a development economics perspective, structural impediments might mean that unemployment-inflation dynamics are influenced by broader developmental stages and not just straightforward long-term trade-offs.
Monetarism
Monetarists claim the long-run Phillips curve is vertical, echoing Milton Friedman’s assertions about the natural rate of unemployment and the ineffectiveness of monetary policy at reducing long-term unemployment beyond its natural rate.
Comparative Analysis
Intersecting views from multiple schools convey a robust debate: while many classical and neoclassical views support a vertical long-run curve, alternative perspectives allow room for debate regarding institutions, behavioral factors, and economic structure.
Case Studies
Examine the periods of policy adjustment following shocks (e.g., 1970s stagflation) when inflation expectations reconfigured people’s expectations and eventually, influenced the shape and position of the curve in different countries.
Suggested Books for Further Studies
- “Inflation, Unemployment, and Monetary Policy” by Robert M. Solow and John B. Taylor
- “Economics” by Paul Samuelson and William Nordhaus
- “Macroecnomics” by N. Gregory Mankiw
Related Terms with Definitions
- Non-Accelerating Inflation Rate of Unemployment (NAIRU) - The specific level of unemployment that does not cause inflation to increase.
- Natural Rate of Unemployment - The long-term
