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Phillips`S Curves

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Phillips`S Curves
Examine the salient features of the Phillips`s Curves. How might elementary textbooks be criticised for writing ‘inflation’ on the vertical axis?

Introduction

Philips curve, named after A.W. Philips, has caused many fierce debates in the area of macroeconomics since the World War II. Based on the data of wages and employment in UK from 1861to 1957, Phillips concluded that there had been an inverse relationship between the percentage rate of unemployment and the percentage rate of change in money wages. And in many subsequent studies based on the study of Phillips, it is very common to substitute the rate of inflation for the percentage rate of money wage changes (1999, Boyes Melvin). Salient Features of Original Phillips`s Curve

Talking about the salient features of Phillips Curve, it could be better that we discuss the development of it.

Firstly, we are going to talk about the original Phillips`s Curve to illustrate some salient features.

Figure1 Original Phillips`s Curve published in 1958 (http://www.jstor.org/view/00130427/di009947/00p00034/0)

As is described in the graph, an x-axis shows unemployment rate and y-axis shows the rate of change in money wages. It can be seen clearly, Phillips`s Curve is non-liner. Basically it is a downward curve (U shape) with negative slopes, which means the unemployment rate and the percentage rate of change in money wages have an inverse relationship. Also, there are anti-clockwise loops around the downward curve. It reflects the difference between rising period and falling period of business activity. Phillips (1958) had two explanations for the curve and loops separately.

His original findings suggest, employers are expected to bid up rates rapidly when the labour demand is high and there are few unemployed. And another situation happens in recessions: the labour demand is low and unemployment turns to be high, but potential employees are not tending to take a job at less than the prevailing rates,


References: William Boyes and Micheal Melvin (1999). Economics Fourth Edition. Houghton Mifflin: 369pp. A.W.Phillips (1958). The Relationship between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957. Economica, (25) 283-99 Milton Friedman (1968). The Role of Monetary Policy. The American Economic Review, Vol. 58, No. 1 (Mar., 1968), pp. 1-17 G. R. Steele (2012). Phillips Curve. Not in the Text Book. 23rd November, 2012:17pp Karl Brunner and Allan H. Meltzer (1976). The Phillips Curve. North-Holland Publishing Company: 2pp
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