The Phillips curve is an economic model used in [macroeconomics](https://www.masterclass.com/articles/learn-about-macroeconomics) that hypothesizes an inverse relationship between [inflation](https://www.masterclass.com/articles/what-is-inflation-in-economics) and the rate of [unemployment](https://www.masterclass.com/articles/learn-about-unemployment) in an economy. It is named after economist A. William Phillips from New Zealand, who first proposed that wages rise faster when unemployment is low. Phillips’s findings implied that, when there is low unemployment (or more people are employed), inflation will increase, and vice versa.
The Phillips curve was theoretically helpful for economists and policymakers—as well as central banks and federal reserve banks such as the [United States Federal Reserve System](https://www.masterclass.com/articles/federal-reserve-explained)—for predicting or forecasting inflation or the [rate of inflation](https://www.masterclass.com/articles/what-is-inflation-rate) in an economy and thereby helping determine [fiscal policy](https://www.masterclass.com/articles/what-is-fiscal-policy) or monetary policy. This is called [Keynesian economics](https://www.masterclass.com/articles/what-is-keynesian-economics-definition-history-and-real-world-examples-of-keynesian-economics), or the macroeconomic theories that try to model the aggregate demand and supply and how it influences productivity of the economy. The hypothetical goal with using a Phillips curve is to find the percentage point on the curve in which inflation is stable and a country has full employment, also called the non-accelerating inflation rate of unemployment (NAIRU).

However, economists determined that the Phillips curve is only viable in the short run, and that inflation expectations and price controls implemented by corporations could shift the curve, making it possible for the level of unemployment to remain high while inflation remains high. While the Phillips curve can still be used to hit inflation targets, predict labor costs, or to understand the trade-off of unemployment and wages, it is not considered totally viable in the long run.
The Phillips curve was first introduced in the late 1950s as a model for the United Kingdom, and was subsequently applied to the U.S. economy. The theory was later scrutinized by economists who provided counterpoints and superior models that could be used to control the labor market and prevent high inflation.

- __Origins__: In 1958, A. William Phillips (also known as A. W. Phillips) was the first to present the concept of the Phillips curve in his paper “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957” published in the journal *Economica*. In this paper, Phillips describes the inverse relationship he observed in the British economy between wage changes and unemployment. 
- __Stagflation__: During the 1970s, the concept of the Phillips curve was challenged when many countries began to experience both high unemployment and inflation. This led critics to argue that the Phillips curve was only applicable in a short-run model, or over a short term such as a few years. In the long run, it was shown that employers and corporations were predicting future inflation and increasing pay rates and prices  accordingly, which caused nominal wages as unemployment rates rose and inflation remained high. The phenomenon of high inflation accompanied by high unemployment rates was named stagflation.
- __Today__: The original Phillips curve is considered overly simplistic by most economists today and isn’t often used in practice. However, the concept of the Phillips curve is still used as a basis for some models that try to predict inflation rates and unemployment.
In the 1960s and ’70s, economists Milton Friedman and Edmund Phelps independently began to challenge the ideas behind the Phillips curve. In 1977, Friedman presented three stages of the Phillips curve, including short-run Phillips curve theories and the long-run Phillips curve theories. These curves predict wage inflation and price levels for economies, and have been used in macroeconomic policy to determine periods of stagflation, to find ways to lower unemployment or lower inflation, and to predict the growth rate for an economy.

1. __The traditional Phillips curve__: The traditional Phillips curve is the original theory presented by A. William Phillips that shows a negative relationship between unemployment and inflation. The traditional Phillips curve relationship is displayed on a graph with unemployment rates represented on the x-axis and inflation rates represented on the y-axis. The slope of the Phillips curve descends downward diagonally in a curve, showing that when an economy experiences high unemployment, it will theoretically also experience low price inflation, and conversely that when there are low levels of unemployment, there will be higher inflation.
2. __The expectations-adjusted Phillips curve__: This stage represents a long-run curve in which workers and employers have anticipated the fluctuations in the economy and have adjusted their employment and wage price plans to prepare. This creates what is called a natural rate of unemployment, in which the wages, unemployment levels, and aggregate demand for products reach a stable equilibrium. This graph shows a traditional Phillips curve, as well as a second, similar curve just to the right of the traditional Phillips curve that represents the sudden shift when economic activity becomes volatile. Finally, a vertical line on the graph represents the long-run Phillips curve, in which inflation does not affect unemployment.
3. __The positively sloped long-run Phillips curve__: This curve is based on the theory that high inflation creates a market volatility that causes future higher rates of unemployment. The graph shows a vertical line that suddenly breaks off to the right diagonally, representing a sudden increase in both inflation and unemployment.
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Since its invention in 1958, the Phillips curve has helped shape policy decisions and sparked controversy. Its guiding principle—that inflation and unemployment are inversely related—came into question during a period of stagflation in the 1970s, but it is nonetheless an important economic concept.

Since its invention in 1958, the Phillips curve has helped shape policy decisions and sparked controversy. Its guiding principle—that inflation and unemployment are inversely related—came into question during a period of stagflation in the 1970s, but it is nonetheless an important economic concept.

Phillips Curve Guide: Definition and History of the Phillips Curve

The Phillips curve is an economic model used in <a href='https://www.masterclass.com/articles/learn-about-macroeconomics' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/learn-about-macroeconomics","linkCopy":"macroeconomics","category":null}'>macroeconomics</a> that hypothesizes an inverse relationship between <a href='https://www.masterclass.com/articles/what-is-inflation-in-economics' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-inflation-in-economics","linkCopy":"inflation","category":null}'>inflation</a> and the rate of <a href='https://www.masterclass.com/articles/learn-about-unemployment' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/learn-about-unemployment","linkCopy":"unemployment","category":null}'>unemployment</a> in an economy. It is named after economist A. William Phillips from New Zealand, who first proposed that wages rise faster when unemployment is low. Phillips’s findings implied that, when there is low unemployment (or more people are employed), inflation will increase, and vice versa.

What Is the Phillips Curve?

The Phillips curve was theoretically helpful for economists and policymakers—as well as central banks and federal reserve banks such as the <a href='https://www.masterclass.com/articles/federal-reserve-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/federal-reserve-explained","linkCopy":"United States Federal Reserve System","category":null}'>United States Federal Reserve System</a>—for predicting or forecasting inflation or the <a href='https://www.masterclass.com/articles/what-is-inflation-rate' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-inflation-rate","linkCopy":"rate of inflation","category":null}'>rate of inflation</a> in an economy and thereby helping determine <a href='https://www.masterclass.com/articles/what-is-fiscal-policy' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-fiscal-policy","linkCopy":"fiscal policy","category":null}'>fiscal policy</a> or monetary policy. This is called <a href='https://www.masterclass.com/articles/what-is-keynesian-economics-definition-history-and-real-world-examples-of-keynesian-economics' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-keynesian-economics-definition-history-and-real-world-examples-of-keynesian-economics","linkCopy":"Keynesian economics","category":null}'>Keynesian economics</a>, or the macroeconomic theories that try to model the aggregate demand and supply and how it influences productivity of the economy. The hypothetical goal with using a Phillips curve is to find the percentage point on the curve in which inflation is stable and a country has full employment, also called the non-accelerating inflation rate of unemployment (NAIRU).However, economists determined that the Phillips curve is only viable in the short run, and that inflation expectations and price controls implemented by corporations could shift the curve, making it possible for the level of unemployment to remain high while inflation remains high. While the Phillips curve can still be used to hit inflation targets, predict labor costs, or to understand the trade-off of unemployment and wages, it is not considered totally viable in the long run.

Is the Phillips Curve Viable?

The Phillips curve was first introduced in the late 1950s as a model for the United Kingdom, and was subsequently applied to the U.S. economy. The theory was later scrutinized by economists who provided counterpoints and superior models that could be used to control the labor market and prevent high inflation.<ul class="mc-m-4 list-styled"><li class="">Origins: In 1958, A. William Phillips (also known as A. W. Phillips) was the first to present the concept of the Phillips curve in his paper “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957” published in the journal Economica. In this paper, Phillips describes the inverse relationship he observed in the British economy between wage changes and unemployment. </li><li class="">Stagflation: During the 1970s, the concept of the Phillips curve was challenged when many countries began to experience both high unemployment and inflation. This led critics to argue that the Phillips curve was only applicable in a short-run model, or over a short term such as a few years. In the long run, it was shown that employers and corporations were predicting future inflation and increasing pay rates and prices accordingly, which caused nominal wages as unemployment rates rose and inflation remained high. The phenomenon of high inflation accompanied by high unemployment rates was named stagflation. </li><li class="">Today: The original Phillips curve is considered overly simplistic by most economists today and isn’t often used in practice. However, the concept of the Phillips curve is still used as a basis for some models that try to predict inflation rates and unemployment. </li></ul>

A Brief History of the Phillips Curve

In the 1960s and ’70s, economists Milton Friedman and Edmund Phelps independently began to challenge the ideas behind the Phillips curve. In 1977, Friedman presented three stages of the Phillips curve, including short-run Phillips curve theories and the long-run Phillips curve theories. These curves predict wage inflation and price levels for economies, and have been used in macroeconomic policy to determine periods of stagflation, to find ways to lower unemployment or lower inflation, and to predict the growth rate for an economy.<ol class="mc-m-4"><li class="mc-my-4"> 1. The traditional Phillips curve: The traditional Phillips curve is the original theory presented by A. William Phillips that shows a negative relationship between unemployment and inflation. The traditional Phillips curve relationship is displayed on a graph with unemployment rates represented on the x-axis and inflation rates represented on the y-axis. The slope of the Phillips curve descends downward diagonally in a curve, showing that when an economy experiences high unemployment, it will theoretically also experience low price inflation, and conversely that when there are low levels of unemployment, there will be higher inflation. </li><li class="mc-my-4"> 2. The expectations-adjusted Phillips curve: This stage represents a long-run curve in which workers and employers have anticipated the fluctuations in the economy and have adjusted their employment and wage price plans to prepare. This creates what is called a natural rate of unemployment, in which the wages, unemployment levels, and aggregate demand for products reach a stable equilibrium. This graph shows a traditional Phillips curve, as well as a second, similar curve just to the right of the traditional Phillips curve that represents the sudden shift when economic activity becomes volatile. Finally, a vertical line on the graph represents the long-run Phillips curve, in which inflation does not affect unemployment. </li><li class="mc-my-4"> 3. The positively sloped long-run Phillips curve: This curve is based on the theory that high inflation creates a market volatility that causes future higher rates of unemployment. The graph shows a vertical line that suddenly breaks off to the right diagonally, representing a sudden increase in both inflation and unemployment. </li></ol>

The 3 Stages of the Phillips Curve

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Since its invention in 1958, the Phillips curve has helped shape policy decisions and sparked controversy. Its guiding principle—that inflation and unemployment are inversely related—came into question during a period of stagflation in the 1970s, but it is nonetheless an important economic concept.

Since its invention in 1958, the Phillips curve has helped shape policy decisions and sparked controversy. Its guiding principle—that inflation and unemployment are inversely related—came into question during a period of stagflation in the 1970s, but it is nonetheless an important economic concept.
