The Phillips curve shows the relationship between the unemployment rate and the inflation rate. This economic concept was introduced in a paper published by A. W. Phillips in 1958 (The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957
), who identified a negative relationship between the unemployment rate and wage rises in the British economy. Subsequently, Paul A. Samuelson and Robert M. Solow observed the same pattern between the level of unemployment and the inflation rate using data for the United States (Analytical Aspects of Anti-Inflation Policy, 1960).
Some years later, Milton Friedman observed that the Phillips curve was not stable over time because economic agents’ inflation expectations would themselves alter inflation. Accordingly, the Phillips curve should take inflation expectations into account.
The Phillips curve plots unemployment on the horizontal axis and inflation on the vertical axis, and is downward sloping, indicating that the higher the level of unemployment, the lower the increase in workers’ wages. Similarly, the lower the unemployment rate, the higher the wage growth. Moreover, structural developments may also affect the slope of the Phillips curve, which will vary over time.
The Phillips curve cannot be directly observed at any given moment. Instead, it must be inferred using data-based econometric models.