Since the early 1960's many economists and policy makers have contended that full employment and price stability are unattainable goals. Stimulated by the works of A. W. Phillips, a British economist, they have argued that there is an inverse relationship between inflation and unemployment; that is, as unemployment decreases, inflation increases. Phillips in his original article, "The Relationship between Unemployment and the Rate of Change in Money Wage Rates in the United Kingdom,"1 cautiously reasoned that when demand for commodities, services or labor was high relative to supply, prices increase. Increasing prices for labor draw out unemployed people into the labor market. The more people that are drawn out of unemployment, the higher the wages and the higher the total spending. Conversely, when demand for commodities, services or labor was low, relative to supply, prices decreased. Decreasing prices in commodities and services usually result in higher unemployment, because of "lay-offs." Decreasing prices for labor do make workers reluctant to enter the market for less than the prevailing rates when demand is low and unemployment is high. Consequently total spending is reduced. Based on the analysis of his data, Phillips hypothesized that as unemployment increased wages tended to decrease.
"The Price of Unemployment and Inflation and Who Pays,"
The Journal of Sociology & Social Welfare: Vol. 8
, Article 12.
Available at: http://scholarworks.wmich.edu/jssw/vol8/iss1/12