Monday, August 24, 2009

Philips Curve

Professor Phillips, formerly of London School of Economists, urged that there was a close link between the level of unemployment and the rate of wage increase. Phillips curve shows this relationship. IT may also be considered a relationship between inflation and unemployment, because when there is inflation money wages invariably go up under trade union pressure.

Rate of unemployment is shown along the x-axis and the rate of wage increase along the Y-axis both in percentage. From this figure which represents a hypothetical economy we find that when wage rise by 2% per annum, unemployment goes up by 4%. Thus we may say that as wages rise unemployment rises more than proportionately. But the curve also shows that when unemployment has reached a very high level, say 5%, wages do not raise at all, which means that in the case of wide spread unemployment the workers are keener to get employment than to fight for higher wages.

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