Long-run Phillips curve
Also called: Vertical Phillips curve · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT
Meaning
The long-run Phillips curve is a vertical line at the natural rate of unemployment. It means that in the long run there is no lasting trade-off between inflation and unemployment. The idea comes from the Friedman–Phelps critique of the late 1960s. Workers eventually come to expect higher inflation and demand matching wage rises. Real wages then return to normal and so does unemployment, while inflation stays higher. Extra inflation therefore cannot keep unemployment low for good.
Example
A government spends more to bring unemployment below its natural rate. At first, jobs rise and prices climb. Once workers expect the higher inflation and bargain for higher wages, unemployment returns to its old level. Only the higher inflation remains.
Don't confuse with
- Short-run Phillips curve: this is the downward-sloping curve based on A.W. Phillips's study of UK data (1958). It shows that lower unemployment comes with higher inflation, but only until expectations catch up.