The Economic Seesaw: Understanding the Phillips Curve

N nominal wage depends on the future price expected by the wage setters and a function of unemployment and catch all variable.

This happens because if the labor market is experiencing high unemployment then people won’t be able to bargain for their price and would end up taking the job at any price offered.

The Phillips Curve is after New Zealand economist A.W. introduced the concept in his seminal paper published in 1958 .

Phillips curve relation between inflation and unemployment broke around 1970s .

As inflation persisted, wage setters adjusted their expectations about future inflation.

This led to a self-reinforcing cycle of rising wages and prices.

The relationship appears to be more complex and possibly influenced by other economic factors not captured in the Phillips curve model.

Advances in technology, automation, and productivity reduce the cost of production, allowing firms to meet increased demand without raising prices.

The availability of cheaper labor overseas reduces the bargaining power of domestic workers, limiting wage growth even when unemployment is low.

Global supply chains mean firms can source products and labor from around the world, putting downward pressure on prices and wages domestically.