The debate of the relationship between inflation and unemployment is mainly based on the famous “Phillips Curve”. This curve was first discovered by a New Zealand born economist called Allan William Phillips. In 1958, A. W. Phillips published an article “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861-1957”, in which he showed a negative correlation between inflation and unemployment (Phillips 1958). As shown in figure 1, when unemployment rate is low, the inflation rate tends to be high, and when unemployment is high, the inflation rate tends to be low, even to be negative.
The relation between unemployment and inflation has long held the attention
of economists. For some time, it was believed that there was a trade-off between the
two that policymakers could exploit. In other words, a lower unemployment rate
could be had by tolerating a higher rate of inflation. That notion is no longer widely
held, at least as regards the long run. While minimal unemployment might seem a
desirable policy goal, few economists would define full employment as employment
for everyone who wants a job. Instead, many would argue that full employment is
the lowest rate of unemployment consistent with a stable rate of inflation. This rate
is known as the natural rate of unemployment.