Phillips curve
In 1958 the economist A. W. Phillips noticed a striking pattern in nearly a century of British data: when unemployment was low, wages (and later, prices) tended to rise faster, and when unemployment was high, they tended to rise more slowly. It looked as though an economy faced a menu — you could have lower unemployment, but only at the cost of higher inflation, and vice versa. That apparent trade-off, drawn as a downward-sloping curve, became the Phillips curve.
The logic is intuitive. When unemployment is low, jobs are easy to find and workers scarce; employers must raise wages to attract and keep staff, and those rising costs feed into higher prices — inflation. When unemployment is high, workers are plentiful and desperate, wage demands fall, and inflation eases. So the curve plots the unemployment rate on one axis and the inflation rate on the other, sloping down: lower unemployment goes with higher inflation. For a while in the 1960s, policymakers treated this as a reliable dial — pick the spot on the curve you prefer.
The Phillips curve still matters enormously, but its story grew more complicated and humbling. In the 1970s many countries suffered stagflation — high unemployment and high inflation at the same time — which the simple curve said was impossible. Economists (notably Friedman and Phelps) argued the trade-off only holds in the short run and shifts once people's inflation expectations adjust; in the long run there is no trade-off at all. Today the consensus is that a short-run trade-off exists but is unstable, depends heavily on expectations, and cannot be exploited for long. It is a real relationship, but a fragile and shifting one — not a fixed lever.
A government, seeing the Phillips curve, deliberately overheats the economy to cut unemployment from 6 to 4 percent. At first it works and inflation ticks up only a little. But after a year or two workers expect the higher inflation, demand bigger raises, and the curve shifts — leaving the economy with both 6 percent unemployment again and higher inflation.
The short-run trade-off is real, but exploiting it shifts the curve and erodes the gain.
The simple downward-sloping Phillips curve broke down in the 1970s stagflation. The modern view keeps a short-run trade-off but insists it shifts with inflation expectations and vanishes in the long run.