The Philips Curve

Question 1

What did Philips compare ?

Answer 1

Wage inflation and unemployment for uk between 1861 and 1957

Noticed negative correlation

Question 2

Low unemployment = higher inflation

Answer 2

When economy is doing well and most people are employed , business competes for workers driving up wages

Higher wages leads to higher costs for businesses passes on to consumer via higher prices

Question 3

High unemployment leads to lower inflation

Answer 3

When unemployment is high there is less demand for goods and services

business don’t need to raise wages to attract workers so inflation tends to be lower

Question 4

In short run for Phillips curve

Answer 4

Trade off between inflation and unemployment

Question 5

Long run Phillips curve

Answer 5

Relationship may breakdown due to factors like expectations inflation

Question 7

How does the government reduce the NRU to increase output and avoid involuntary unemployment ?

Answer 7

Reduce income tax to improve incentives to look for and accepts paid work

Remove ‘labour market imperfections’

Reform welfare system to reduce risk of benefits trap

Reforming TU power reduce collective bargaining power (closed shops illegal)

Reduce barriers to labour immobility

put up professional bodies and associations which have the effect of limiting the supply of labour into an occupation