The Phillips CurveEconomists agree that unemployment and inflation are two of the major macroeconomic problems of the twentieth century. If there was a relationship between the two, this would represent a major step forward for macroeconomic management. Phillips's work was empirical: he began with evidence and worked toward a theory. The causality of Phillips' theory was that the level of unemployment caused the rate of change in money wages to remain what it was. What economic theory is hidden behind this? When unemployment decreases, the available labor force decreases. This means that resources become increasingly scarce and workers can push for higher wages. Or, when unemployment falls, more people have more income and spend more, causing an increase in aggregate demand leading to demand-pull inflation. What the Phillips curve proposed was that there was an inverse relationship between unemployment and the rate of change of money wages. As a piece of historical economic research, the Phillips curve can be seen as a success. However, is it possible to consider it as a piece of economic theory? No one suggested that the curve should have been in a different location. However, it could have been argued that for the first period in which he studied the data, from 1861 to 1913, it was too unreliable. . After all, for most of that time there was no government data on unemployment, and many politicians refused to accept that the problem existed. Phillips' contribution and Keynesian demand management? of economic policy and were managing the level of demand in the economy in order to achieve full employment. Keyne...... half of the document ......y means of reducing wage pressures from unions. Or the demand pull school might be correct, in which case unemployment reduced inflation by reducing aggregate demand. This suggests that as unemployment falls, the inflation rate will rise again. Advancing further there are theories that move away from the Phillips curve completely, even in the short run. This theory is called rational expectations. It was argued that if wage negotiators had known that the government had adopted adequate anti-inflationary policies they would have reduced wage agreements. Employers and unions would know that inflation would come down thanks to appropriate government policy. The pain of economic adjustment would be much less and unemployment would not have to rise as much. However, when this theory is applied to inflation and unemployment, it appears too optimistic.