The Phillips curve, named after A. W. Phillips, describes the relationship between unemployment and inflation. In 1958 Phillips, then professor at London School of Economics, took time series data on the rate of unemployment and the rate of increase in nominal wage rate for the United Kingdom for the period 1861-1 957 and attempted to e'stablish a relationship. He took a simple linear equation of the following form:
w = a - bu
where w is the rate of wage increase, a and b are constants and u is the rate of unemployment. He found that there exists an inverse relationship between w and u, with the implication that lower rate of unemployment is associated with higher rate of wage increase. The policy implication of such a result was astounding - an economy cannot have both low inflation and low unemployment simultaneously. In order to contain unemployment an economy has to tolerate a higher rate of wage increase and vice versa.
Subsequent to the publication of the results by Phillips, economists followed suit and attempted similar exercises for other countries. Some of the studies carried out refinements to the simple equation estimated by Phillips such as the use of inflation (the rate of increase in prices) instead of wage rate increase. 1n/ many cases the scatter of plot of variables appeared to be a curve, convex to the/ origin. As empirical studies reinforced the inverse relationship between the rate: of inflation and the rate of unemployment the Phillips curve soon became an: important tool of policy analysis. The prescription was clear: during periods of high unemployment the government should follow an expansionary monetary policy which leaves more money in the hands of people. It may accelerate the rate of inflation while lowering unemployment.