The Economics Book

202

THE MORE PEOPLE AT

WORK, THE HIGHER

THEIR BILLS

INFLATION AND UNEMPLOYMENT

F

or 30 years after World War II

the world’s more developed

economies enjoyed their

longest ever period of growth.

Unemployment was low, incomes

rose, and economists thought they

had overcome the crises of the 1930s.

This confidence stemmed from

a belief in the power of government

intervention to manage the economy,

which was powerfully summarized

in the Phillips Curve. In 1958, New

Zealander Bill Phillips published

The Relationship Between

Unemployment and the Rate of

Change of Money Wages, showing

a link between wage inflation and

unemployment in the UK from

1861–1957. Years of high inflation

were years of low unemployment,

and vice versa.

Inflation or employment?

Later work showed similar, stable

relationships for other developed

countries. Governments realized

that there was a trade-off between

inflation and unemployment. They

If unemployment is high, the

government can boost demand by

increasing its spending.

This causes prices to rise (inflation)

and unemployment to fall.

The more people

at work, the higher

their bills.

IN CONTEXT

FOCUS

Economic policy

KEY THINKER

Bill Phillips (1914 –75)

BEFORE

1936 John Maynard Keynes

attempts to explain

unemployment and recessions.

1937 British economist John

Hicks turns Keynes’s insights

into a mathematical model.

AFTER

1968 Milton Friedman argues

that the Phillips Curve should

account for people’s

expectations of inflation, and

that there is a “natural” rate of

unemployment.

1978 Economists Robert Lucas

and Thomas Sargent attack

the Phillips Curve.

From 1980s New Keynesian

macroeconomics rehabilitates

the possibility of stabilizing

the macroeconomy (the whole

economy).

But as more people are

needed for employment, wages

rise, pushing up other prices.