Phillips Curve

Figure 4.8: Phillips's Original Data and Curve for British Wage Inflation and Unemployment (1861–1913)

An economist studying a country's economic data from the late 19th century observes a stable, inverse relationship between the unemployment rate and the rate of change in nominal wages. This pattern held consistently for several decades. Which of the following statements best analyzes the nature of this empirical finding, consistent with the context of its original discovery?

Analyzing Historical Economic Data

Characteristics of an Early Macroeconomic Observation

Based on his analysis of historical British data, William Phillips's original empirical finding was that a stable, inverse relationship existed between the unemployment rate and the rate of general price inflation.

An economic advisor in the early 20th century is reviewing several decades of British economic data. They consistently observe that in years when the unemployment rate is low (e.g., 2-3%), nominal wages tend to rise, and in years when the unemployment rate is high (e.g., 8-9%), nominal wages tend to be stagnant or fall slightly. Based solely on this persistent, long-term empirical pattern, what is the most logical conclusion for the advisor to draw?

Explaining the Stability of an Early Economic Observation

An economic advisor in the early 20th century is presented with a robust empirical study covering 50 years of national data. The study demonstrates a consistent and stable inverse relationship: years with high unemployment saw little to no change in nominal wages, while years with low unemployment saw significant increases in nominal wages. Specifically, the data shows that an unemployment rate of approximately 7% corresponded with zero wage growth. Based solely on this observed stable pattern, what policy trade-off would the advisor most likely conclude exists?

An economist examines a multi-decade dataset from a historical period where inflation expectations were largely static. The data reveals a consistent, inverse relationship between the unemployment rate and the rate of change in nominal wages. Which of the following statements most accurately characterizes the specific nature of this empirically observed relationship?

Policy Assumption Based on Historical Data

William (Bill) Phillips

An economist presents a study of 50 years of national economic data, showing a consistent and stable inverse relationship between the unemployment rate and the rate of wage increases. The data indicates that an unemployment rate of 7% consistently corresponds to zero wage growth. A government official, seeing this stable pattern, argues for a new policy to permanently keep unemployment at 3%, believing this will guarantee strong, predictable wage growth indefinitely. Which of the following statements provides the most critical evaluation of the official's policy assumption?

Based on his analysis of historical British data, William Phillips's original empirical finding was that a stable, inverse relationship existed between the unemployment rate and the rate of general price inflation.