Write one short 5-line paragraph SUMMARY of the article Then a second 5-line paragraph describing the lecture
Question:
- Write one short 5-line paragraph SUMMARY of the article
- Then a second 5-line paragraph describing the lecture topic the article relates to
- And in the second paragraph state lessons learned
Jobs and Inflation: The Great Trade-Off, Demystified
When unemployment goes down, inflation picks up, and when unemployment goes up, inflation cools down. That has been a central tenet of economics for the past 60 years, guiding Federal Reserve policy makers and private forecasters.
In 1958 Alban William Housego Phillips, a New Zealand economist whose résumé included stints hunting crocodiles in Australia and operating a secret radio in a Japanese prisoner-of-war camp, published the paper that would make him famous. In it, he showed that in the years spanning 1861 to 1957 the unemployment rate and wage inflation in the U.K. were negatively correlated—meaning that when one went up, the other one tended to go down, and vice versa.
But the Phillips curve isn’t a static relationship over the long haul, with any given unemployment rate leading to a predetermined level of inflation. People’s inflation expectations matter, as economists Milton Friedman and Edmund Phelps pointed out in the late 1960s and America painfully learned in the 1970s.
But since the early 2000s, and especially since the financial crisis, the Phillips curve hasn’t been behaving like economists thought it would. When the unemployment rate shot higher following the financial crisis, inflation fell less than Phillips curve models predicted. And when the unemployment rate fell to 3.5% in late 2019, inflation was remarkably muted. An alternative Phillips curve, based on the pace of gross domestic product rather than the unemployment rate, has run into the same problems.
Some people have suggested that, as a result of forces such as globalization and the reduced bargaining power of workers, the Phillips curve relation is broken.
One possibility for why, on a national basis, the Phillips curve has gotten out of kilter may be a downward shift in how low the unemployment rate can go without inflation accelerating. Technology may have made it easier for employers to find employees, for example. And an increased willingness to hire and promote women and minorities may have led businesses to take on workers who in the past were underutilized.
Another possibility is that after years of persistently low inflation, inflation expectations have become so set that changes in the unemployment rate affect inflation less than in the past. That would explain the “flattening” in the Phillips curve many economists believe has occurred, with changes in the unemployment rate associated with smaller changes in the inflation rate than before.
Finally, it could be that after years of inflation coming in below the Fed’s 2% target, inflation expectations have slipped. If that is right, then it could take an even lower unemployment rate than economists think to push inflation meaningfully higher again.