in a year of rising business
activity, with the demand for labour increasing and the percentage
unemployment decreasing, employers will be bidding more vigorously
for the services of labour than they would be in a year during which
the average percentage unemployment was the same but the demand
for labour was not increasing. Conversely in a year of falling business
activity, with the demand for labour decreasing and the percentage
unemployment increasing, employers will be less inclined to grant wage
increases, and workers will be in a weaker position to press for them,
than they would be in a year during which the average percentage
unemployment was the same but the demand for labour was not
decreasing.
the lower an economy's rate of unemployment, the more rapidly wages paid to labor increase in that economy
inflation and unemployment have a stable and inverse relationship. According to the Phillips curve, the lower an economy's rate of unemployment, the more rapidly wages paid to labor increase in that economy.
The implication was
that, given a trade-off between inflation and unemployment, policymakers could
"buy" a lower rate of unemployment at the cost of a higher rate of inflation.
The curve describing this trade-off became known as the "Phillips curve." A
stable Phillips curve would mean that policymakers might choose one among several
combinations of inflation and unemployment rates that seemed to be most palatable
and set that as the goal of macroeconomic policy. The U.S. experience of the 1960s
did little to disprove that view.