Overview
The Phillips curve comes from a 1958 article in Economica by the New Zealand-born economist A. W. (Bill) Phillips. Using UK data for 1861–1957, Phillips found a stable relationship: years of low unemployment tended to have faster growth of money wages, and years of high unemployment slower growth. The idea was later broadened to the relationship between unemployment and price inflation.
The Phillips curve as a policy menu
Samuelson and Solow (1960) plotted US unemployment against inflation and suggested that policymakers could choose, for example, a little less unemployment at the cost of a little more inflation. In the 1960s the curve was widely treated as a "menu" from which fiscal and monetary policy could choose. It remains a starting point for understanding central-bank policy-rate decisions and the resulting movements in deposit and loan rates and bond prices.
The expectations-augmented curve and the natural rate
Phelps (1967) and Friedman (1968) stressed that workers and firms set wages based on the inflation they expect. Expansionary policy can push unemployment down at first, but once people build the higher inflation into their expectations, unemployment returns to its natural rate and only inflation is left higher. The short-run Phillips curve therefore slopes downward, while the long-run curve is vertical at the natural rate. The stagflation of the 1970s, when high unemployment and high inflation appeared together after the oil shocks, strengthened this view.
Limitations and debate
The non-accelerating inflation rate of unemployment (NAIRU) cannot be observed directly and shifts over time, so estimates are uncertain. In several countries unemployment fell sharply without much rise in inflation, prompting talk of a "flattened" curve, and large supply shocks can shake the relationship badly. The Phillips curve is therefore treated less as a fixed law than as a relationship that moves with expectations and supply conditions.
Using it in economics study and exams
The Phillips curve is a staple of introductory and macroeconomics courses and of economics tests for the civil service, public enterprises and the financial sector. You should be able to draw what shifts the short-run curve (expected inflation, supply shocks) and explain the vertical long-run curve. It is easiest to understand alongside Okun's law, which links unemployment and output, and money demand and monetary aggregates.
Sources reviewed: 2026-10-16
References
- Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957. Economica, 25(100), 283–299.
- Samuelson, P. A., & Solow, R. M. (1960). Analytical aspects of anti-inflation policy. American Economic Review, 50(2), 177–194.
- Phelps, E. S. (1967). Phillips curves, expectations of inflation and optimal unemployment over time. Economica, 34(135), 254–281.
- Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17.