long-run Phillips curve
The original Phillips curve seemed to promise governments a permanent deal: accept a bit more inflation forever, and keep unemployment permanently lower. But what happens after people get used to the higher inflation? They start expecting it, build it into their wage demands and price-setting, and the supposed bargain evaporates. The long-run Phillips curve captures this sobering truth — over the long haul, you cannot buy lower unemployment with more inflation.
The key insight, developed by Milton Friedman and Edmund Phelps, is that the short-run trade-off works only because people are temporarily fooled. If inflation rises unexpectedly, real wages briefly fall, firms hire more, and unemployment dips. But once workers realise prices are rising and demand matching raises, employment returns to its natural rate — only now with higher inflation locked in. Repeat the trick and you just get ever-higher inflation with no lasting drop in unemployment. Drawn on the same axes, the long-run Phillips curve is therefore a vertical line sitting at the natural rate of unemployment: any rate of inflation is compatible with that one unemployment rate in the long run.
This is one of the most important results in macroeconomics and it reshaped policy worldwide. It means there is no permanent inflation-unemployment trade-off; the long-run cost of chronically loose policy is just higher inflation, not lower joblessness. It is a central reason central banks now anchor inflation expectations and target low, stable inflation rather than trying to spend their way to permanently low unemployment. The honest caveat: the verticality is a long-run, expectations-based proposition, and the speed at which the short run becomes the long run — how fast expectations adjust — is itself debated.
A country runs loose policy for a decade, hoping to keep unemployment below its natural rate of 5 percent. It ends the decade with unemployment back at 5 percent anyway, but with inflation stuck at 10 percent instead of 2 percent. The extra inflation bought no lasting jobs — exactly what a vertical long-run Phillips curve predicts.
In the long run the curve is vertical at the natural rate: more inflation, same unemployment.
The long-run Phillips curve being vertical does not deny a short-run trade-off; it says you cannot keep exploiting it. How quickly the long run arrives depends on how fast expectations adjust, which is debated.