inflationunemployment

Inflation–unemployment describes how inflation and unemployment interact within an economy. The concept is central to macroeconomic theory and policy because it frames how policy choices may affect price stability and job creation. The term is closely linked to the Phillips curve, which in the mid-20th century suggested an inverse short-run relationship between unemployment and inflation.

In the original Phillips framework, lower unemployment came at the cost of higher inflation and vice versa. This trade-off was thought to reflect wage-setting behavior and a stable short-run relationship. Over time, economists stressed that expectations, supply shocks, and policy credibility can shift or flatten the curve, making the trade-off less predictable.

In the long run, many economists argue the trade-off does not persist. The expectations-augmented Phillips curve posits that attempting to keep unemployment below its natural rate leads to rising inflation without reducing unemployment in the long run. The natural rate of unemployment (often linked to the NAIRU) acts as a benchmark for policy. Okun's law provides a link between unemployment and real GDP, suggesting higher unemployment accompanies weaker output.

Empirical experience varies by country and period. The 1970s featured stagflation, with high inflation and high unemployment, challenging a simple trade-off. Since the 1990s, many economies with credible inflation targeting have seen low and stable inflation alongside low unemployment, implying a weaker long-run relationship.

Policy implications center on balancing inflation goals with labor-market outcomes. Central banks monitor inflation and unemployment data, use credibility-enhancing measures, and adjust policy rates to steer inflation toward target while avoiding excessive unemployment.