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The hidden link between inflation and unemployment: Do you know the story behind the Phillips Curve?
The Phillips Curve has been one of the core concepts in economics since it was first proposed. This curve reveals the subtle relationship between the unemployment rate and the inflation rate, and illustrates the difficulties policymakers face when regulating the economy. Through historical review, it is not difficult to find that several economic crises since the 18th century have made people rethink the practical significance of this relationship.
Economist Bill Phillips first quantified the relationship between unemployment and wage growth in 1958, demonstrating an inverse relationship.
Phillips' findings were groundbreaking at the time and led to a model showing that when unemployment falls, wages rise. This finding was later expanded upon by Paul Samuelson and Robert Solow, who specified a link between inflation and unemployment. However, this relationship does not hold true in the long run, especially in the stagflation scenario of the 1970s. Fincherman and Preps' research showed that there is no stable trade relationship between inflation and unemployment.
"Inflation policy cannot reduce unemployment in the long run."
Over time, the economics community's use of the Phillips Curve has evolved. The slope of the Phillips curve appears to be trending downward over the past decade, leading to questions about its ability to predict inflation. A 2022 study showed that even in the early 1980s, the slope of the curve was relatively small, calling into question whether the Phillips Curve is still an effective tool for central bank decision-making and analysis.
In the historical context, we see that changes in the Phillips Curve are not only a reflection of data, but also a product of the socio-economic environment. The economic stagflation phenomenon in the 1970s challenged traditional economic theory. Economists such as Milton Friedman proposed that the inverse relationship between unemployment and inflation that exists in the short term will lose its effect in the long term once inflation expectations are taken into account. They point out that if workers anticipate inflation, they will demand higher wages when signing labor contracts, leading to a rebound in unemployment and higher inflation.
"If unemployment is below the natural rate, inflation tends to accelerate."
Looking back over the course of the economy, we can see that each turning point in these fluctuations revealed the limitations of economic principles and challenged our understanding of those principles. Judging from the cases in recent years, it is even more important to learn from the lessons of the past. The Phillips Curve is not eternal; its meaning and impact are constantly being re-examined over time.
Current researchers are trying to use new economic models to explain the long-term relationship between inflation and unemployment in a more complex way. For example, the so-called New Keynesian Phillips Curve takes the expected inflation rate into account to better predict the relationship between inflation and unemployment in the short term. Furthermore, it is crucial for economic policy makers to understand the dynamics of inflation under different conditions.
"Increased inflation may temporarily reduce unemployment in the short run, but not in the long run."
In short, the theory expressed by the Phillips Curve not only affects the formulation of macroeconomic policies, but also triggers changes in financial markets. In the face of today's ever-changing economic environment, its principles are still worth pondering from all walks of life. In the future economic situation, how will the interaction between unemployment rate and inflation be interpreted, and how will it change the direction of our economy?
