3. Relationship between Unemployment and Inflation Rate

♤ Professor Phillips, emphasized that there exists a close relationship between the level of unemployment and the rate of wage increase in an economy. This relationship between the two is depicted in the form of Phillips curve.

♤ It is a graphic curve, which advocates a relationship between inflation and unemployment in an economy. As per the curve there is a ‘trade off’ between inflation and unemployment

i.e. an inverse relationship between them. The curve suggests that lower inflation, higher unemployment and higher inflation, lower unemployment.