Phillips Curve – definition
A Phillips Curve is a curve that shows the inverse relationship between unemployment, as a percentage, and the rate of change in prices. It is named after New Zealand economist AW Phillips (1914 – 1975) who derived the curve after analysing the statistical relationship between unemployment rates and wage inflation in the UK between 1861and 1957.
In this simple example, a reduction in unemployment from 3% to 2% would be consistent with a rise in the inflation rate from 2% to 6%. The Phillips Curve becomes steeper the nearer the unemployment rate approaches zero %.
The Phillips Curve has been influential in developing the mathematical models used by central banks and other forecasting organisations.
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Read more on the Phillips Curve
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Listen to Tim Harford’s podcast on Phillips – The Indiana Jones of Economics